Is uncertainty about whether a token is a utility or a security causing tax anxiety? Are investors and issuers confused about how HMRC will treat token receipts, disposals and income? This guide gives a practical, HMRC-focused framework to decide whether a token is a utility or a security for UK tax, shows the tax consequences for each classification and sets out clear steps for reporting ICOs, STOs and token sales.
Key takeaways: what to know in 1 minute
- HMRC classifies tokens by function, not label. Look at legal rights, economic return and transferability when deciding utility vs security token tax outcome.
- Utility tokens commonly attract VAT or prepayment treatment; security tokens commonly trigger capital gains or income tax depending on circumstances.
- A token becomes a security for tax when it confers economic or ownership rights, or predictable returns. Documentation and marketed features matter as evidence.
- Reporting obligations differ for issuers and investors. ICO/STO proceeds, token swaps, airdrops and staking rewards have distinct HMRC reporting routes.
- Practical planning reduces risk: keep transactional records, prepare a classification memo, and use contractual design to clarify economic rights.
How HMRC distinguishes utility and security tokens
HMRC applies a functional test. Labels used by promoters are secondary to substance. Key indicators used in HMRC manuals and guidance include:
What HMRC looks at to classify a token
- Legal rights: Does the token give legal entitlement to ownership, dividends, interest or redemption? If yes, it points to a security.
- Economic return: Is there an expectation of profit, yield or revenue share that is linked to the issuer’s performance? Predictable returns point to security status.
- Transferability and market behaviour: Tokens traded like securities on secondary markets strengthen the argument for security classification.
- Purpose and utility: Tokens that simply enable access to a product, service or platform and do not give economic rights are likely to be utility tokens.
Evidence matters: white papers, terms and conditions, smart contract code, marketing materials and the real-world behaviour of the token are admissible when HMRC assesses classification. For reference, see HMRC cryptoassets guidance and the Cryptoassets Manual at gov.uk.
Practical checklist for initial classification
- Is the token redeemable for a fixed monetary value? → security indicator.
- Does the token give voting or ownership rights? → security indicator.
- Does the token provide non-financial access to a service (consumption)? → utility indicator.
- Are returns dependent on the issuer’s profits? → security indicator.
Tax implications for utility tokens in the UK
Utility tokens generally act as prepayments for services or as vouchers for platform use. Tax consequences differ for individuals and businesses.
VAT and utility tokens
- If a token is effectively a voucher for supply of services, VAT may apply on redemption. Where tokens represent payment for future use, VAT is normally accounted at the point of supply of the service, not necessarily on issuance.
- For businesses issuing tokens, VAT treatment depends on whether the token is a single-purpose voucher or a multi-purpose voucher under VAT rules. Consultation with a VAT specialist is recommended.
Income and capital tax issues for investors holding utility tokens
- Purchasing a utility token with fiat or crypto is generally a disposal of the consideration asset (e.g., disposal of crypto-for-crypto) and can create a CGT event for the seller of the consideration.
- When the holder redeems the token for services, there is normally no additional CGT on the redemption itself if the token merely entitles the holder to consumption; however, any disposal of the token on a secondary market may be a CGT disposal.
Example: utility token VAT and CGT worked example
- Alice buys a utility token for £100 (paid by bank transfer). The platform later supplies services worth £100 when the token is redeemed. VAT applies to the service at redemption. From Alice’s personal tax position, there is no CGT event on redemption; a disposal would occur only if Alice sold the token to Bob before redemption.
When a token becomes a security for tax purposes
A token becomes a security when substance confers rights typical of securities. HMRC examines a mixture of legal and commercial features.
Key triggers that convert a token into a security
- Contractual entitlement to profits or interest — tokens promising dividends, interest or revenue sharing are likely securities.
- Redemption at issuer discretion for value — if the token can be redeemed for a monetary amount or is subject to a buyback, it behaves like a security.
- Transferable ownership stakes — tokens representing equity or partnership stakes are securities.
How small changes in design change tax status
- Adding a profit-sharing clause or fixed yield to a token moves it towards security classification.
- A marketing campaign promising “returns” or “investment growth” increases the risk HMRC will view the instrument as a security.
Decision tree: simple flow (textual)
- Does the token give entitlement to a share of profits, dividends, or fixed interest? → If yes, treatment like a security.
- Is the token primarily for access/consumption with no economic return? → If yes, likely a utility token.
- Are holders able to expect a predictable monetary yield? → If yes, likely a security.
Capital gains versus income tax on tokens
Whether gains on tokens are taxed as capital gains or income depends on the actor (investor vs trader), frequency, intention and nature of rights.
Investors (capital treatment typical)
- Individuals who hold tokens as an investment and later dispose normally face Capital Gains Tax (CGT) on net gains after allowances. Security tokens that reflect ownership are subject to CGT on disposal.
- If token activity amounts to a trade (frequent buying and selling, market-making or promoting tokens with profit motive), profits could be taxable as trading income (Income Tax for an individual or Corporation Tax for a company).
Specific cases where income tax applies
- Token rewards from staking where the activity resembles a trade or where the rewards are akin to interest or dividends may be taxable as income.
- Tokens received from an airdrop as a result of promotional activity might be taxable as miscellaneous income where there is an identifiable source linked to services performed.
Worked numerical example: CGT vs income
- Investor buys security token A for £1,000 and sells two years later for £4,000. If held as an investment, taxable gain = £3,000 minus annual CGT allowance. If treated as trading income, the full £3,000 may be taxed as income at marginal rates; the difference can be substantial for high earners.
Reporting ICOs, STOs and token sales to HMRC
Reporting obligations differ for issuers and holders. Accurate records and timely reporting are essential to reduce exposure to penalties.
Issuers: reporting proceeds and corporate tax/VAT
- Proceeds from an ICO or STO must be accounted for in a company’s accounts. If the proceeds are revenue in nature, corporation tax applies; if proceeds are capital receipts and represent equity, capital treatment may apply.
- For VAT, if tokens represent payment for services, VAT is due when the service is supplied. Seek a VAT ruling if the status is uncertain.
Investors: self-assessment and CGT reporting
- Individuals must report disposals of cryptoassets (including token sales) on their self-assessment tax return. Where gains exceed the CGT exempt amount, payment is due by the usual deadlines.
- Crypto-to-crypto trades, token swaps, and token-for-service exchanges create taxable events and should be recorded.
Reporting checklist for an ICO/STO
- Retain the white paper and terms with timestamps.
- Maintain transaction-level records: dates, counterparties, values in GBP at time of each transaction (use a recognised rate source).
- Produce a classification memo that explains why tokens were designed as utility or security.
- If in doubt, obtain a legal opinion and keep it on file for HMRC enquiries.
How to classify and report a token for HMRC
Step 1: gather documentation and evidence
- Collate white papers, token terms, smart contract code, marketing copy and board minutes that relate to the token.
Step 2: apply the HMRC functional test
- Assess legal rights, economic returns and transferability against HMRC indicators.
Step 3: decide reporting route and record calculations
- If security: prepare CGT calculations for disposals and consider dividend/interest reporting rules.
- If utility: consider VAT timing and record any sales/disposals for CGT.
Step 4: file with self-assessment or corporation tax
- File disposals, trading receipts or corporation tax returns with correct figures and attach explanatory notes where classification is novel.
Comparative table: utility versus security token tax outcomes
| Feature |
Utility token (typical) |
Security token (typical) |
| Primary function |
Access to service or platform |
Economic rights, ownership or returns |
| VAT |
Possible at redemption if represents service |
Generally not VAT; financial instrument exemptions may apply |
| Tax on investor disposal |
CGT on disposal if sold; redemption for service often not CGT |
CGT on disposal; income tax if trading or receiving dividends/interest |
| Issuer tax |
Revenue recognition for services; VAT considerations |
Proceeds may be capital or revenue for corporation tax; regulatory considerations |
| HMRC evidence focus |
Utility, functional use, no return promise |
Contractual returns, redemption rights, profit-share clauses |
Infographic textual flow: classification and reporting
- Step 1: Read the token terms 🧾 → Step 2: Identify rights (ownership vs access) 🔍 → Step 3: Check for return expectation 📈 → Step 4: Classify as utility or security 🏷️ → Step 5: Follow VAT/CGT/Income reporting route 📑 → ✅ Compliance achieved
Comparative: utility token vs security token (tax view)
Utility token
- ✓Access to services
- ⚠Potential VAT on redemption
- ✓CGT on secondary market sales
Security token
- ✗Economic or ownership rights
- ✗Subject to CGT or income tax
- ⚠May trigger regulatory and reporting duties
Advantages, risks and common errors
✅ Benefits and when to apply specific approaches
- Design tokens as clear utilities where the project’s economics permit, to reduce likelihood of security classification and avoid complex financial reporting.
- Use clear contractual language that limits holders' entitlement to non-financial benefits where utility status is intended.
- Keep thorough records to prove the intended use and actual behaviour of tokens in case HMRC queries classification.
⚠️ Risks and errors to avoid
- Promotional language promising returns can alter HMRC’s view; avoid phrases like “expected 10% yield” unless that is an intended financial product and the issuer is prepared for regulatory oversight.
- Poor documentation — missing white papers, inconsistent smart contract code or changes in terms after issuance can create HMRC exposure.
- Failure to convert transaction values into GBP for reporting; HMRC expects values in sterling at time of each taxable event.
Questions frequently asked
What is the difference between a utility token and a security token for HMRC?
A utility token grants access to goods or services and typically lacks economic rights. A security token grants ownership, profit entitlement or predictable returns and is taxed like a financial instrument.
How will HMRC tax gains from selling security tokens?
Gains from selling security tokens are usually subject to Capital Gains Tax for individuals; trading activity or recurring income could attract Income Tax or Corporation Tax.
Are token sales in an ICO reportable to HMRC?
Yes. Issuers must reflect proceeds in accounts and tax returns; investors must report disposals on self-assessment where appropriate. Keep full transaction records.
Does receiving airdrops create a tax liability?
Airdrops can create taxable events. If tokens are received in return for services or form part of trading, they may be taxed as income. Otherwise disposal later is a CGT event.
How should staking rewards be taxed?
Staking rewards may be treated as income if they resemble interest or reward for activity; the tax position depends on facts and frequency.
When should a legal opinion be sought?
If classification is uncertain or token design includes return features, obtain a legal opinion and document the rationale for classification to support HMRC-facing explanations.
Your next step:
- Prepare a classification memo: collect white papers, smart contract code, marketing materials and write a 1–2 page functional test applying HMRC indicators.
- Reconcile transaction records into GBP at time of each event and update bookkeeping accordingly; use a reliable conversion source.
- If classification is unclear or monetary exposure is significant, obtain a legal tax opinion and document the process for HMRC.