Are lending returns, collateral events or defaults from crypto lending taxable and how should they be reported on a UK self-assessment? Many UK taxpayers are uncertain whether interest, rewards or losses from crypto lending count as income, capital gains or business losses. This guide sets out clear rules, worked examples and record templates to make Crypto Lending Tax compliant and defensible before HMRC.
Key takeaways: what to know in one minute
- Crypto lending income is usually taxable as trading income or miscellaneous income depending on the facts; identify the activity's commerciality.
- Losses from crypto lending can be business losses if the activity is a trade; otherwise they are capital losses usable only against capital gains.
- HMRC expects concise, contemporaneous records showing platform transactions, dates, counterparties, and the crypto-fiat values at each event.
- Carry back and carry forward reliefs exist for allowable trading losses but strict time limits and interaction with other reliefs apply.
- Practical calculation examples clarify when to report lending events as income vs disposals.
When do crypto losses qualify as business losses?
Whether a loss arising from crypto lending can be treated as a business loss for tax purposes depends on whether the activities amount to a trade. HMRC applies ordinary tests of trading: frequency, organisation, commerciality, and intention to make a profit.
- If lending activity is systematic, runs like a business (scale, repeated operations, business-like books), losses can be trading losses and set against other income in certain circumstances.
- If lending is occasional, passive or purely investment-like (lend one holding casually), losses are likely capital and only usable against capital gains.
Important factors that point to trading status: business plan, separate accounting, active management of liquidity and collateral, advertising or offering lending services, or use of institutional platforms with contractual facilities.
HMRC reference: HMRC cryptoassets guidance explains general tests for trading applied to crypto.
Examples of activities likely to be trading
- Operating an automated lending business across multiple platforms with scale and marketing.
- Offering lending services to third parties as a commercial enterprise.
- Repeatedly entering short-term lending with active repositioning and reinvestment.
Examples of activities likely to be capital (non-trading)
- Lending a personal Bitcoin holding infrequently to receive occasional interest.
- One-off peer-to-peer loans for diversification without business infrastructure.
Differentiating trading versus investing for Bitcoin tax
Clear distinction between trading and investing is essential for Crypto Lending Tax because tax outcomes differ (income tax/NICs vs capital gains tax). Use a facts-based approach:
- Frequency: daily automated lending suggests trading; a single occasional loan suggests investing.
- Organisation: dedicated accounting, separate entity or business processes point to trading.
- Purpose: documented intention to profit from lending activity (not merely price appreciation) supports trading.
- Risk: acceptance of third-party counterparty risk and active risk management indicate trading.
Table: quick comparison of trading vs investing for crypto lending
| Feature |
Trading (income tax) |
Investing (CGT/capital) |
| Typical frequency |
High, repeated |
Low, occasional |
| Books and accounting |
Structured, business-like |
Minimal |
| Intention |
Profit from lending activities |
Long-term price appreciation |
| Tax treatment |
Income tax / NICs; trading losses available |
Capital gains tax; capital losses only |
| Reliefs |
Trading loss reliefs (carry back/forward) |
CGT loss offset only |
How HMRC treats crypto losses in self-assessment
HMRC expects each taxable event to be reported in the correct box on the self-assessment. The treatment depends on the activity classification:
- If activity is trading: declare income and allowable expenses in the trading section; declare trading losses as per the rules (see carry back/forward below).
- If activity is investment-related: report disposals and capital losses in the capital gains section.
- If lending generates interest-like income but not trading: report as miscellaneous income (property or other income) where applicable.
Important practical notes:
- Convert crypto amounts to GBP at the time of each event using a reliable exchange rate and state the source if HMRC asks.
- Where lending generates rewards (paid in a different crypto), treat the receipt as a taxable disposal of what was received at its market value and a subsequent acquisition for that value.
- Defaults, liquidations or collateral liquidations often produce two events: a disposal (for any crypto seized or sold) and a market-value loss to record.
Cite HMRC on valuations: HMRC business income manual – valuations.
- Trading profits and losses go on the Self Assessment SA103 (or company tax return for a limited company).
- Capital losses appear on the Capital Gains summary (SA108).
- Include explanatory notes in the return or in a supplementary PDF attachment where events are complex.
Claiming carry back and carry forward crypto reliefs
If crypto lending is trading and produces an allowable trading loss, reliefs may apply:
- Carry back: a trading loss can be carried back one year against trading profits of the preceding year. Special rules apply where the loss relates to terminal losses or where the trader ceases to trade.
- Carry forward: a trading loss not relieved in earlier years can be carried forward to offset future profits of the same trade.
Key constraints and interactions:
- Losses that are capital in nature cannot use trading loss reliefs.
- Using a loss against other income (e.g. employment income) requires specific claims and timing rules.
- Corporation tax has different carry rules; company lenders should follow CT guidelines.
Practical claim steps:
- Identify the loss and classify as trading loss in tax computations.
- Make the claim on the tax return for the year of loss (or within the statutory claim period).
- Keep contemporaneous accounts to justify the claim if HMRC queries it.
Example: basic carry back calculation (worked example)
Suppose a sole trader lending crypto has a trading profit of £25,000 in year 1 and a trading loss of £15,000 in year 2. The trader may carry back the £15,000 to year 1, reducing year 1 taxable profit to £10,000, subject to conditions and the time limits on the claim.
Records and evidence HMRC expects for crypto trades
HMRC emphasises good records. For Crypto Lending Tax, recommended minimum records are:
- Date and time of each transaction or lending event.
- Type and quantity of cryptoasset.
- GBP value at time of event and the exchange rate source.
- Counterparty or platform used and corresponding transaction IDs.
- Contract terms where a loan was agreed (interest rate, collateral details, maturity).
- Evidence of defaults, liquidations or on-chain events (screenshots, blockchain hashes).
Practical record checklist:
- Exported CSVs from platforms with transaction IDs.
- Bank statements for fiat movements to/from platforms.
- Screenshots or PDFs of loan contracts and platform terms.
- A reconciled ledger (spreadsheet) that maps each blockchain event to the tax event and GBP value.
Include an explicit statement in the tax return if valuations are complex and retain a reproducible valuation method.
Checklist: records HMRC expects for crypto lending
✓ Transaction exports
CSV with IDs, timestamps and amounts
✓ Valuation source
Exchange rate and market snapshot time
✓ Contract documents
Loan terms, collateral and default clauses
✓ Reconciliation ledger
Linking blockchain events to tax events
Practical examples: calculating business loss relief for Bitcoin
This section offers worked examples to show when a loss is trading and how reliefs apply. The numbers are realistic and simplified for clarity.
Example 1: regular lending business — trading loss
Facts:
- A sole trader runs an automated lending strategy across platforms.
- Year 1 profit from lending activity (after expenses): £40,000.
- Year 2 the business suffers a default and records a trading loss of £30,000 (allowable after adjusting for non-deductible items).
Tax effect:
- Carry back option: claim to carry back £30,000 against Year 1 profits of £40,000, reducing Year 1 taxable profit to £10,000. This produces an immediate tax refund for Year 1 tax paid (subject to PAYE/NICs and timing).
- If not fully relieved by carry back, the remaining loss can be carried forward against future profits of the trade.
Example 2: passive lending of personal Bitcoin — capital loss
Facts:
- An individual lends 1 BTC (acquired in 2020 at £20,000). During a platform default, the BTC is seized and the individual records a loss when the asset is deemed disposed at £15,000.
Tax effect:
- The event is a disposal of a capital asset; the loss is a capital loss of £5,000 and can only be offset against capital gains in the same or future years.
- No trading loss relief is available because the activity lacks trading characteristics.
Example 3: mixed activity and apportionment
If an individual both actively operates a lending service and occasionally lends personal holdings, segregation and careful accounting are required. The trading component can show trading profits/losses; the personal lending remains capital. Apportionment must be rational and documented.
Advantages, risks and common errors
✅ Benefits and when to apply
- Use trading loss reliefs when the activity is genuinely commercial to accelerate relief and potentially secure refunds.
- Detailed records reduce audit risk and make valuations and loss claims credible.
- Early classification and consistent reporting avoids later disputes with HMRC.
⚠️ Errors to avoid and risks
- Misclassifying capital losses as trading losses without evidence invites enquiry and potential penalties.
- Poor valuation records (no time-stamped GBP conversions) often lead to HMRC adjustments.
- Mixing personal and business wallets makes it hard to substantiate business status.
Practical mitigation: maintain separate wallets/accounts for any activity intended to be a trade, and document business processes.
Frequently asked questions
What exactly is crypto lending income for tax purposes?
Crypto lending income is typically treated as either trading income (if part of a trade) or miscellaneous income. HMRC looks at the activity's organisation and intent to decide.
Can interest paid in crypto create two taxable events?
Yes. Receiving interest in a different crypto can create a taxable disposal (receipt at market value) and then an acquisition at that same value for future CGT or trading records.
How should defaults or collateral liquidations be recorded?
Record both the disposal (or constructive sale) event and the resulting loss measured at market value; provide platform evidence and blockchain references.
Is it necessary to convert every transaction into GBP?
Yes. HMRC requires figures in GBP on the self-assessment. Use a consistent, reasonable exchange-rate source and keep evidence of the chosen rate and timestamp.
Can a company operating crypto lending use the same reliefs as individuals?
Companies follow corporation tax rules for trading losses and have different carry back/carry forward rules; professional tax advice is recommended for corporate structures.
How long should records be kept for crypto lending?
Standard HMRC retention: at least 5 years after the 31 January submission deadline of the relevant tax year, but longer retention is prudent for complex cases.
What happens if HMRC questions a trading loss claim?
Expect a request for supporting documentation. If records are complete and valuations transparent, the position will usually be defensible; consider professional representation for complex disputes.
Your next step:
- Compile a single reconciled ledger mapping all lending events to GBP values and platform IDs.
- Determine whether lending activity meets trading tests; document the business plan and operations that support the chosen classification.
- If claiming trading losses, prepare a clear tax computation and retain all source files and valuation snapshots.