What is the difference between crypto income and capital gains?

Cryptocurrency is taxed differently depending on how it is earned or disposed of. HMRC separates crypto activity into two main categories: income and capital gains. Each has distinct tax rules, reporting methods, and implications for individuals and businesses. Knowing which applies to your situation helps you stay compliant and avoid paying the wrong amount of tax.

Understanding crypto income

Crypto income refers to cryptocurrency you receive through work, rewards, or services. It includes tokens or coins gained in exchange for effort, skill, or participation rather than investment.

Common examples include:

• Mining rewards earned from validating blockchain transactions

• Staking rewards received for helping to secure a network

• Airdrops where coins are distributed for promotional or technical reasons

• Referral or affiliate rewards paid in crypto

• Payments for services received in cryptocurrency

In these cases, the value of the crypto received counts as income for tax purposes. The amount to report is based on the pound sterling value at the time you receive it, not when you sell it later.

If you are self-employed or run a business, this income forms part of your trading profits. For employees, it may be treated as employment income and subject to Income Tax and National Insurance.

What counts as capital gains

Capital gains arise when you sell, swap, or otherwise dispose of cryptocurrency that you already own. You make a gain if the value when you sell is higher than when you acquired it.

Examples include:

• Selling crypto for fiat currency such as pounds

• Exchanging one cryptocurrency for another

• Spending crypto to buy goods or services

• Gifting crypto to someone other than a spouse or civil partner

The gain is calculated by comparing the disposal value with your allowable cost (purchase price plus any associated fees). If your total gains exceed the annual Capital Gains Tax allowance, you’ll pay tax at either 10% or 20% depending on your income level.

Key differences between income and capital gains

While both involve cryptocurrency, they are taxed under different rules.

Factor Crypto Income Capital Gains

How it’s earned Received through work, staking, mining, Arises from selling or exchanging an

airdrops or services investment

When tax applies When the crypto is received When the asset is disposed of

Type of tax Income Tax and possibly National Insurance Capital Gains Tax

Valuation point Market value at the time of receipt Difference between sale value and cost basis

Records required Details of how and when crypto was received Records of purchases, disposals, and prices

Tax rate Based on your income band (20%, 40%, or 45%) 10% or 20% depending on overall income

These distinctions matter because treating income as a gain or vice versa could result in incorrect filings and unexpected bills.

Mixed situations

Some situations involve both income and capital gains. For example, if you earn staking rewards, the crypto you receive is taxable as income at that time. Later, when you sell those same tokens, any increase in value from when you received them to when you sell counts as a capital gain.

This dual taxation can surprise investors who assume that paying Income Tax on the initial reward covers everything. In reality, you must keep accurate records for both events to avoid over- or under-paying tax.

Crypto for businesses and sole traders

If you operate a business that trades, mines, or accepts crypto payments, all related activity may fall under trading income rules. HMRC considers whether your activity looks like a trade, based on factors such as frequency, intention to profit, and level of organisation.

For example, if your company accepts Bitcoin as payment for goods or services, the sterling value at the time of receipt forms part of trading income. When the company later sells or converts that crypto, any change in value creates a chargeable gain or loss for Corporation Tax purposes.

Sole traders face similar rules, reporting crypto income and capital gains through Self Assessment. Expenses such as transaction fees or software subscriptions can be claimed if wholly and exclusively for business use.

Calculating tax correctly

When calculating your crypto income or capital gains, convert all figures into pounds sterling using the market value on the date of each transaction. HMRC expects consistent and reliable valuations based on recognised exchanges.

For capital gains, apply the share pooling rules that average out your costs for identical tokens. This avoids selective selling of profitable or loss-making coins to reduce tax artificially.

If you hold crypto as part of your business, ensure your accounting software records these values correctly and that gains or losses are reflected in your accounts.

Common mistakes to avoid

Many taxpayers make errors when distinguishing between crypto income and capital gains. These are some of the most frequent issues:

• Assuming all crypto is capital gains: Rewards from staking or mining count as income first.

• Using sale proceeds without valuation at receipt: HMRC taxes income based on receipt value, not later sale value.

• Failing to report disposals: Even small trades between coins count as disposals and can create taxable gains.

• Not separating personal and business activity: Keep distinct records for each to ensure clarity and avoid confusion.

• Ignoring losses: You can report capital losses to offset future gains, reducing your tax bill.

Record-keeping requirements

HMRC requires detailed records for every crypto transaction, including:

• The date of each transaction

• The type and quantity of tokens

• The value in pounds at the time

• The wallet or exchange used

• The nature of the transaction (buy, sell, trade, earn, spend)

Keep these records for at least five years after the Self Assessment submission deadline or six years for companies. Proper documentation protects you during audits and ensures accurate calculations.

How to stay compliant

To stay compliant, maintain separate wallets for personal and business crypto, use software that automatically tracks transactions, and reconcile values regularly in pounds sterling. Review HMRC guidance annually, as regulations evolve quickly in response to changes in the digital asset market.

If your transactions are frequent or complex, it’s worth seeking help from a crypto accountant. They can ensure your reports align with current HMRC rules and help you optimise your tax position within the law.

Conclusion

The difference between crypto income and capital gains lies in how the cryptocurrency is obtained and when it is taxed. Income tax applies when you receive crypto as payment, reward, or compensation. Capital Gains Tax applies when you sell, exchange, or spend crypto investments for profit.

By keeping accurate records, valuing transactions correctly, and understanding both types of taxation, you can manage your crypto portfolio responsibly and stay compliant with HMRC requirements.