When I first sent Horse into the bar, he had been paid in USDT and discovered that every pint, and every favourite salt lick, could require a Capital Gains Tax computation.
HMRC’s call for evidence gave Horse hope.
Never to disappoint its equine citizens, the government has now published draft legislation that should remove this problem for Horse, and many other human stablecoin users, provided the token qualifies as an “eligible stablecoin”.
Read on for my initial take on this draft legislation (albeit from my sun-lounger in Italy)
Key points
- From 6 April 2027, disposals of eligible stablecoins by individuals and trustees would be exempt from Capital Gains Tax, including eligible non-sterling stablecoins.
- The exemption would apply generally, rather than only to low-value payments. Gains would be exempt, but losses would not be allowable.
- Eligibility would generally be fixed by reference to the day on which the stablecoin was acquired. Holdings of the same token acquired when it was eligible and ineligible could therefore form separate pools.
- Certain interest-like returns would be treated as interest, and therefore as savings income, rather than miscellaneous income.
- Companies would not receive a Capital Gains Tax exemption. Eligible stablecoins and related transactions would instead be brought within the loan relationship rules.
- The draft interacts closely with the companion legislation for cryptoasset loans and liquidity pools. Withholding tax and several points of practical application remain unresolved.
Back at the bar
In my original LinkedIn post, Horse walked into a bar looking rather glum.
His employer paid him in stablecoin. That might not have been too troublesome had the token been pegged to sterling, although there would still have been plenty of record keeping. Unfortunately, Horse was paid in USDT. Every pint bought with the token was therefore a disposal, potentially producing a sterling exchange gain or loss. The same applied to his salt licks and, in principle, everything else he purchased.
The barman, who was unusually well informed on both cryptoassets and tax, eventually put the pint on the house. Horse then sat down to read HMRC’s call for evidence and was heartened by the possibility that the tax system might stop treating an everyday payment token like an investment asset.
The joke reflected a real problem. Stablecoins are presently treated, broadly, in the same way as other cryptoassets and are not generally regarded as money for tax purposes. Spending them, exchanging them for another cryptoasset or converting them into fiat currency can amount to a disposal for Capital Gains Tax purposes.
A sterling-denominated token may produce little or no economic gain, but the transaction still has to be tracked. A US dollar-denominated stablecoin can create genuine sterling gains and losses as exchange rates move. That may be manageable for someone already using specialist crypto tax software. It is much less realistic if stablecoins are to be used for ordinary card payments, remittances or day-to-day purchases.
From a call for evidence to draft legislation
HMRC launched its call for evidence on 26 March 2026 and closed it on 7 May. It received 29 formal written responses, together with feedback from roundtables and bilateral discussions.
All respondents supported some form of reform. Around 80% of those expressing a view on Capital Gains Tax favoured a full exemption, while almost all respondents considered that non-sterling stablecoins should be included. That second point matters because US dollar-denominated tokens dominate the present market. A sterling-only reform might have solved the theoretical pint problem while leaving Horse’s actual USDT untouched.
The government has accepted the majority view. Draft legislation was published on 13 July 2026 for inclusion in Finance Bill 2026-27. The technical consultation closes on 7 September 2026.
For individuals and trustees, the new rules would take effect from 6 April 2027. For companies, they would apply to accounting periods beginning on or after 1 April 2027, with an accounting period split where it straddles that date. HMRC estimates that the measure could affect around 1.2 million individuals.
The policy is described as treating stablecoins “more like money”. That is a useful summary, but the draft does not declare stablecoins to be money for every legal or tax purpose. It creates targeted rules for Capital Gains Tax, Income Tax and Corporation Tax.
What is an eligible stablecoin?
The exemption does not apply to anything described as a stablecoin. It must be reasonable to assume that:
- a sufficient amount of currency or other assets is held for the purpose of maintaining a stable value in relation to sterling or another currency;
- the token is designed to be used as a means of payment or settlement; and
- tokens of that type are widely available.
Wide availability requires the tokens to be made available to a substantial number of unconnected persons acting independently. It must also be reasonable to assume that they are, or will be, traded with sufficient frequency and volume to constitute an active market.
The requirement for supporting assets is intended to exclude unbacked algorithmic stablecoins. The draft is not limited to cash-backed tokens, however. It refers to currency “or other assets”, although cryptoassets of the same type as the stablecoin itself are disregarded as backing. Some over collateralised, crypto-backed tokens could therefore qualify if the wider conditions are met.
The reference value must be sterling or another currency. A token designed to track gold, another commodity or a non-currency basket would fall outside the wording.
The “means of payment or settlement” condition should capture conventional payment stablecoins, but may be less straightforward for tokens designed mainly as collateral, treasury instruments or yield-bearing products. Actual use is not expressly the test. The statutory question concerns the token’s design.
The definition is jurisdiction-neutral. A token does not have to be issued in the UK, and the government rejected a UK-only approach because it would have little practical effect in a global market.
USDT and USDC are obvious candidates, but the legislation does not name or automatically approve either. HMRC has said that guidance will set out its view of the largest stablecoins currently in use. That will be important because an ordinary user cannot be expected to analyse reserve arrangements and legal rights before buying a pint.
A potential problem for new UK tokens
The wide availability condition is understandable as an Exchequer safeguard. It should prevent a privately created token from being used to manufacture exempt gains.
It also creates a possible chicken-and-egg problem. A newly issued UK stablecoin may be well backed, designed for payment and subject to regulation, but still fail the tax test because it has not yet reached a substantial number of users or developed an active market.
That sits uneasily with the concern in my original post that the UK stablecoin industry was barely out of the starting gate. The technical consultation should consider whether a regulated new issue needs a safe harbour or a route to prospective clearance.
Individuals and trustees: the Capital Gains Tax exemption
The core rule is simple. A gain arising to a person other than a company on the disposal of an eligible stablecoin, or an interest in one, would not be a chargeable gain.
The exemption is not confined to buying goods and services. It can apply when an eligible stablecoin is sold for sterling, exchanged for another cryptoasset, transferred as consideration or otherwise disposed of. The government rejected an exemption limited by end use because holders may not know how a token will eventually be used, base-cost tracking would still be required and the distinction could create planning opportunities.
For Horse, spending qualifying USDT after commencement should no longer produce a Capital Gains Tax computation. A movement in the sterling value between payday and the purchase of a pint would be outside Capital Gains Tax.
That does not make the salary tax-free. Stablecoins received as employment remuneration would still be taxed as earnings by reference to their sterling value, with the usual employment tax obligations. The change concerns the later disposal of the token, not the original receipt of income. The same distinction applies where a trader receives stablecoins for goods or services.
Non-sterling stablecoins are included
The decision to include non-sterling tokens is one of the most important aspects of the reform.
A US dollar stablecoin can produce a real sterling gain or loss, whereas a sterling token should remain close to £1. Exempting the dollar token therefore gives up more than merely removing negligible gains.
Respondents argued that excluding non-sterling tokens would make the reform largely ineffective. The government agreed and considers that the exemption will give them the same practical treatment as foreign currency held in a bank account.
This is the answer to Horse’s main complaint. The rule is capable of applying to a dollar-denominated token such as USDT, provided it satisfies the eligibility conditions.
Exempt gains also mean unrelieved losses
The government considered, but rejected, a no gain, no loss approach.
Some respondents suggested rolling a stablecoin gain or loss into the base cost of another chargeable asset when the token was used to buy that asset, while exempting a direct conversion into fiat currency. The government concluded that this could allow gains to be exempted while losses were preserved through another cryptoasset. It also rejected special loss relief where a token loses its peg, on the basis that this would amount to the Exchequer partially underwriting the loss.
The exemption is therefore symmetrical. Gains are not taxed, but losses are not allowable.
That will usually be uncontroversial while a token remains close to its target value. It becomes more significant following a permanent depeg, issuer failure or reserve shortfall. A holder could suffer a substantial economic loss without Capital Gains Tax relief.
Eligibility is fixed by the acquisition day
One of the less obvious features of the draft is that eligibility for the Capital Gains Tax exemption is generally tested by reference to the day on which the holder acquired the asset, rather than the day of disposal.
For assets acquired before commencement, the relevant day is 6 April 2027. There is also a continuity rule for certain transfers between spouses and civil partners.
This provides certainty, but produces potentially surprising results. On the draft wording:
- a token that qualifies when acquired should remain within the exemption for that holding even if it later loses its backing, ceases to be widely traded or collapses; and
- a token that does not qualify when acquired may remain outside the exemption for that holding even if it later becomes fully backed and widely adopted.
The first result reinforces the point about losses. If the token was eligible on acquisition, a later loss following a depeg should remain unrelieved.
Separate pools for the same token
A person could therefore hold two tax pools of the same token: one containing units acquired when the token qualified and another containing units acquired when it did not.
The draft treats exempt and non-exempt holdings as different classes. A partial disposal is matched against the non-exempt pool first, then against the exempt pool. The actual tokens delivered do not override that rule.
Suppose Alex acquires 1,000 units of StableX while it is ineligible. The token later qualifies and Alex acquires another 1,000 units. If Alex sells 500 units, those units would be identified first with the non-exempt holding and any gain would remain chargeable.
This protects the Exchequer from taxpayers selecting exempt units for gains and non-exempt units for losses. It also means that platforms and software will need to retain the token’s status on each acquisition date.
Existing holdings: a deemed disposal on 6 April 2027
The transitional rule deserves attention.
Where an individual or trustee holds an asset immediately before 6 April 2027 and a future disposal would be exempt, the person is treated as disposing of and immediately reacquiring it at market value immediately before that date. Any gain or loss is treated as accruing on 6 April 2027.
This is not a tax-free rebasing. It crystallises the gain or loss that arose before the exemption began.
Suppose Horse acquired 10,000 USDT for £7,500. Immediately before 6 April 2027, the holding is worth £8,000 because of movement in the sterling-dollar exchange rate. He would be treated as realising a £500 gain on 6 April 2027, despite not selling the tokens.
Future gains would be exempt, while a pre-commencement loss could be crystallised before future losses become unavailable. The rule preserves the existing tax position, but may require valuations of every qualifying holding and can produce a charge without an actual sale.
Interest-like returns become savings income
The legislation also changes the treatment of certain returns earned from eligible stablecoins.
At present, a return from lending a stablecoin is not generally interest because the stablecoin is not regarded as money. For an individual, it will commonly be miscellaneous income unless the activity amounts to a trade.
The draft would treat a qualifying stablecoin return as interest. There are two principal routes.
First, a return under a “cryptoasset debt”, meaning an arrangement under which the person is owed cryptoassets, can qualify where the return is by reference to the time value of the assets and they are eligible stablecoins when the return accrues.
Secondly, a return under a qualifying Single Cryptoasset Lending Arrangement can qualify where the invested assets are eligible stablecoins when the return accrues. Those arrangements are defined in the companion draft and must be economically equivalent to lending.
The return would become savings income. Depending on the taxpayer’s circumstances and the rules then in force, the Personal Savings Allowance may apply rather than the Trading and Miscellaneous Income Allowance.
That will not benefit everyone. Some respondents preferred the present treatment because the Trading and Miscellaneous Income Allowance can keep small receipts outside Self Assessment. The government has favoured alignment with fiat savings over preserving that result.
The draft does not deem every stablecoin reward to be interest. For a cryptoasset debt, the return must relate to the time value of the assets. Returns from automated market making are outside the policy because trading fees and liquidity incentives are not necessarily equivalent to interest. Staking rewards, governance tokens and other DeFi receipts will continue to depend on their legal and economic character.
There is also a timing difference. Capital Gains Tax status is generally fixed on acquisition, while the return is tested when it accrues. The principal holding could therefore remain exempt even if later returns cease to be treated as interest.
Withholding tax remains open
The draft does not settle the application of withholding tax to stablecoin lending.
The government recognises both the need to protect the Exchequer and the practical difficulty of imposing withholding obligations in decentralised arrangements, where there may be no conventional payer. Further work is continuing, so an important part of the policy has not yet reached draft legislative form.
Companies: into the loan relationship rules
Companies would not receive the individual exemption. A new Chapter 6B in Part 6 CTA 2009 would instead bring eligible stablecoins and certain related debts within the loan relationship regime.
For those purposes:
- an eligible stablecoin held by a company would be treated as a money debt owed to the company;
- an eligible stablecoin issued by a company would be treated as a money debt owed by the company;
- a debt that is, has been or may be settled by transferring an eligible stablecoin would be treated as a money debt; and
- an eligible stablecoin, and a debt arising from lending cryptoassets that were eligible stablecoins when the transaction began, would be treated as arising from a transaction for the lending of money.
Profits and losses would generally follow the amounts recognised in the company’s accounts under the loan relationship rules, rather than requiring separate chargeable gains computations. This should produce a more coherent result for companies using stablecoins as treasury assets, settlement instruments or lending assets.
A separate amendment provides that a cryptoasset can be an “instrument issued” representing creditor rights or security for a money debt. That may also be relevant to tokenised debt instruments.
Respondents noted that companies do not account for stablecoins consistently. The government rejected an eligibility test based on accounting classification. Instead, where an eligible stablecoin is recognised as an intangible asset and relevant amounts appear in other comprehensive income, those amounts would be brought into account as loan relationship credits or debits.
Corporate commencement and transition
The rules apply to accounting periods beginning on or after 1 April 2027, with a straddling period split.
Where an existing asset was outside the loan relationship rules immediately before commencement but enters them under the new legislation, the company is treated as disposing of and reacquiring it for its tax-adjusted carrying value on 1 April 2027. Any chargeable gain or allowable loss on the notional disposal arises on that date.
Unlike the individual transition, the company rule uses tax-adjusted carrying value rather than market value. Companies will need to model the interaction between their existing chargeable gains basis, accounting value and opening loan relationship position.
The corporate definition also lacks the individual’s acquisition-day test. Eligibility appears to depend on whether the token satisfies the conditions at the relevant time. The consequences of a token entering or leaving eligibility after commencement may need further explanation.
Interaction with cryptoasset lending and liquidity pools
The stablecoin legislation was published alongside the new regime for cryptoasset loans and liquidity pools. The two measures are designed to prevent gains and losses moving between exempt and chargeable assets.
Where a qualifying Single Cryptoasset Lending Arrangement relates to an exempt stablecoin, the participant’s interest in the arrangement would itself be exempt. The ordinary no gain, no loss rules for chargeable cryptoassets would not apply, while the qualifying return can be taxed separately as interest.
The special borrower rules do not apply where the borrowed cryptoassets are eligible stablecoins when transferred to the borrower. The draft also contains a closing mechanism if non-exempt borrowed tokens become eligible while the borrowing remains open.
An automated market maker interest does not become exempt merely because one side of the pool is an eligible stablecoin. The no gain, no loss rule does not apply to the exempt stablecoin element. The stablecoin disposal remains exempt in its own right, while the AMM interest remains within the ordinary Capital Gains Tax rules. This keeps exempt and chargeable assets on their respective sides of the boundary.
What the legislation does not change
The phrase “more like money” should not obscure the measure’s limited scope.
The draft does not remove Income Tax from stablecoins received as salary, trading receipts or remuneration. It does not make profits from a trade in stablecoins exempt.
Nor does it rewrite every other tax. Stablecoins remain property for Inheritance Tax purposes. Where they are used as consideration for goods or services, VAT applies to the underlying supply in the ordinary way. They can also amount to money’s worth for stamp tax purposes.
This is a targeted simplification, not a declaration that an eligible stablecoin is sterling, foreign currency or legal tender.
What still needs attention?
The direction of travel is welcome, but several issues remain.
First, HMRC’s guidance will need to tell users not only which major tokens it regards as eligible, but from what date and on what evidence. Historic versions may be required because Capital Gains Tax treatment depends on the acquisition day.
Secondly, the active market test may favour established overseas tokens over newly regulated UK issues. A safe harbour or clearance process deserves consideration.
Thirdly, “a sufficient amount” of backing is undefined. The draft does not specify a percentage, valuation method, liquidity requirement, testing frequency or whether holders need direct redemption rights.
Fourthly, token migrations, bridges, wrappers and changes to reserve arrangements may cause eligibility to change. Guidance will be needed on whether versions of what the market regards as the same token are the same “type” for tax purposes.
Fifthly, the deemed disposal on 6 April 2027 may surprise taxpayers and can crystallise sterling exchange gains without an actual sale.
Finally, the withholding tax position must be resolved if stablecoin lending is expected to become a mainstream financial activity.
Conclusion
When Horse first entered the bar, the tax system expected him to calculate a sterling gain or loss every time he bought a pint with USDT. The call for evidence recognised that this was not a workable foundation for widespread payment use.
The draft legislation now provides a serious answer.
From 6 April 2027, an individual or trustee should be able to spend, exchange or sell an eligible stablecoin without a Capital Gains Tax charge or a calculation for each disposal. Importantly, the rule is capable of covering non-sterling tokens rather than waiting for a large sterling stablecoin market to emerge.
The price of simplicity is that losses are also excluded. Eligibility depends on detailed statutory conditions and, for Capital Gains Tax, on the token’s status when acquired. Existing holdings face a deemed disposal at commencement. Interest-like returns move into savings income, while companies enter the loan relationship regime.
So Horse’s position has improved, but he still needs to check that USDT is eligible, account for tax on his salary and accept that the Exchequer will not share the pain if the token collapses.
The barman should no longer need to put every pint on the house.
Whether the new rules are quite the gift horse they first appear will depend on the final drafting and the quality of HMRC’s guidance.
This article is based on draft legislation published on 13 July 2026. The provisions are not yet law and may be amended before enactment. The technical consultation closes on 7 September 2026.
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HMRC links:
- HMRC general note: https://www.gov.uk/government/publications/tax-treatment-of-stablecoins/taxation-of-stablecoins
- HMRC draft legislation: https://assets.publishing.service.gov.uk/media/6a4fb438a4890e65cce64c3e/Stablecoins_Draft_Legislation.pdf