Stablecoins in the UK: The tax consequences…
Written by Laura Knight, Knightbridge Tax Ltd
Stablecoin regulation is a priority for the UK government and is addressed within the FCA cryptoasset roadmap that was published late 2024, with plans for discussion and consultation papers during 2025 with a view to a defined regulated framework in 2026.
The regulations will hopefully provide clear definitions and clarity for businesses looking to operate in the UK from a legal perspective with a drive to wider adoption in the UK - but what about the tax implications?
Legal Status and Taxation in the UK
HMRC has not provided any specific guidance on stablecoins. However, they have provided guidance on cryptoassets and stablecoins are included within that definition. HMRC’s current position is that stablecoins are not currency or money. This means that stablecoins are subject to tax on disposal and are unable to benefit from exemptions that would be available if you were disposing of fiat currency.
A bit of background history
For UK tax purposes, a disposal of currency or money that is not denominated in sterling is considered to be a chargeable asset and would ordinarily be subject to Capital Gains Tax (CGT). Exemptions were introduced that take the following currency transactions out of tax:
the use of foreign currency overseas for personal expenditure for individuals;
foreign currency bank accounts where they are no longer subject to CGT following a change to the tax rules from 6th April 2012.
As HMRC does not classify stablecoins as currency or money for tax purposes, these foreign currency tax exemptions do not apply and even sterling-backed stablecoins, whilst only likely to incur nominal if any CGT liabilities (subject to the backed assets retaining the same value as the stablecoin) are subject to the reporting complications (set out below).
UK Companies, including UK branches and other businesses subject to UK tax, will also need to consider the tax and accounting treatment for receiving and using stablecoins for payment or trading.
Examples of stablecoin disposals include:
If a stablecoin is used as a payment or purchase for a product or service.
Paying contractors or employees in a business
Investment in a pre sale or platform or business that raises funds through stablecoins
Trading between cryptoassets or when coming in and out of cryptoasset DeFi positions
The largest and most widely used stablecoins are pegged and backed to USD. From a UK perspective, the value of any disposal proceeds and costs have to be converted to GBP which means UK taxpayers are subject to CGT on the exchange fluctuations of the dollar on a disposal event if they use a stablecoin instead of using actual US dollars.
Conversely, if you were to use a GBP backed stablecoin, whilst it needs to be tracked and included for reporting requirements under the existing UK tax system as an asset, it would be unlikely to result in any consequential gains and losses at the point of disposal unless the underlying asset depegs and/or because of liquidity there has been a fluctuation in value. This is because the underlying asset is not subject to currency fluctuations as it is ultimately backed by UK fiat currency.
What are the complications for CGT being applied to stablecoins?
The biggest issue is that once you are subject to CGT, you are subject to complex cost basis pooling (known as s.104 pooling under TCGA 1992) and matching where you must track all acquisitions and disposals of the same asset in one pool, irrespective of holding across different wallets, accounts and exchanges that may have been used.
Frequent transactions involving stablecoins can therefore lead to numerous taxable events, complicating record-keeping and tax reporting. Each transaction requires detailed supporting evidence, including the date, value in GBP at the time of both the acquisition and disposal transactions, and the nature of the transaction, to accurately calculate gains or losses and will involve needing to use appropriate tax software to track. This would also apply to sterling backed stablecoins, even if there was no gain or loss to record.
Example to demonstrate some of the potential reporting and tax implications of purchasing and using a stablecoin:
Miss Y, UK resident since birth, uses GBP from her bank account to purchase 1,000 USDZ ($1,000) on 25th September 2024 using exchange A.
The USD to GBP exchange rate on 25th September 2024 was 0.750:1
The purchase price for the 1,000 USDZ in GBP terms was £750.
At 25th September 2024, Miss Y has a s.104 pool of 1,000 USDZ and cost basis for that of £750.
Miss Y also purchases a further 1,000 USDZ ($1,000) on 5th November 2024 using exchange B and transfers GBP from her bank account to purchase the USDZ.
The USD to GBP exchange rate on 5th November 2024 was 0.775:1
The purchase price for the 1,000 USDZ in GBP terms was £775.
At 5th November 2024, Miss Y has a s.104 pool of 2,000 USDZ with a total cost basis of £1,525 (£750 plus £775). This is required to be tracked and pooled together for tax purposes regardless of the fact they are held across different exchanges.
On 19th January 2025, Miss Y uses the 2,000 USDZ to purchase a service. The cost of the service was $2,000.
The USD to GBP exchange rate on 19 January 2025 was 0.825:1
The disposal value for the 2,000 USDZ is £1,650.
Miss Y has made a UK capital gain of £125 (£1,650 less the cost of £1,525).
Miss Y now has to account for that gain against all other chargeable gains and losses in the year to make sure she correctly calculates and reports to HMRC.
Capital Gains Tax Allowance
There is a capital gains annual allowance for individuals of £3,000 from 6 April 2024 onwards. Frequent transactions could mean unintentionally exceeding this £3,000 allowance.
If after costs and losses in the year and brought forward have been deducted you have made a net gain of over £3,000 in a tax year then you will need to report to HMRC and pay the relevant tax liability. This applies for all cryptoasset disposals.
For individual investors. capital losses cannot be carried back so if you make a gains of over £3,000 in the tax year 5 April 2025 but make losses in 5 April 2026 you cannot carry back that loss.
The complex matching rules are not just for individuals. Companies subject to corporation tax also have their own specific matching rules when they make a disposal of a cryptoasset including stablecoins. Companies also have additional accounting reporting to factor in.
Simplifying the UK tax system
The challenge we are faced with now for stablecoins is similar to the complex and excessive compliance burden that was required as part of tracking movements between foreign currency bank accounts up to 5th April 2012, but tax changes were introduced that mitigated this issue.
We now need to consider a comparable review of the tax regime for stablecoins. If the UK Government is aiming for stablecoins to be more widely adopted as part of the digital asset and payment ecosystem for the UK then the existing compliance and tax issues need to be recognised. Knightbridge Tax therefore encourages consultation for tax simplification and fairness at an early stage alongside the regulatory roadmap and welcome further discussions on this topic.
It is, however, an interesting point to note that the tax consequences for GBP stablecoins are generally minimised compared with foreign-currency backed stablecoins, which could further strengthen the rationale for the use of a GBP stablecoin, subject to sufficient liquidity of course, but an interesting argument nonetheless!
Please note that the purpose of this document is to provide indicative guidance relating to the tax regime for stablecoins. This is by no means to be considered advice nor to be comprehensive of all the tax implications that you may need to take into account when calculating your tax liabilities. We encourage you to seek professional advice in order to understand your specific circumstances.