Veteran investor Warren Buffett might have described them as “a mirage”, but cryptocurrencies such as Bitcoin are generating a lot of very real attention right now.

The surging interest in digital currencies across the globe is down in no small part to Donald Trump. Despite his previously derogatory comments, the President embraced the sector while on the campaign trail with promises to “do something great with crypto”. Since taking office, he has embarked on a plan to make the US the “crypto capital of the planet”, even launching his own official cryptocurrency.

In the UK, the vast majority of the population (93%) are aware of cryptoassets and around 7 million people are thought to own them – up from an estimated 2.2 million in 2021, according to research from the Financial Conduct Authority. The regulator said cryptoassets are increasingly being considered by consumers as part of a wider investment portfolio.

But while it might have grown in popularity, crypto remains a highly volatile, high-risk option. Markets are not regulated and investors, despite optimistic expectations of significant returns, should equally prepare themselves for unpredictable price activity and the possibility of substantial losses.

Acknowledging risks

To summarise, cryptoassets or cryptocurrencies exist purely electronically and effectively act as a means of storing value. Well-known examples include Bitcoin, Ethereum and Dogecoin. Transfers and payments are made via blockchain technology, which acts as a peer-to-peer ledger of activity.

Crucially, cryptoassets are not governed or controlled by a central bank or government. Investors do not have the protections of the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS), for example, and any complaints are unlikely to be addressed by the FCA – despite a third of crypto investors wrongly believing this to be the case.

In the case of ‘stablecoins’, such as Tether and USD Coin, the value of the cryptocurrency is bound to another asset, such as another currency, commodity or financial instrument. In theory, this makes stablecoins less volatile than other crypto investments, but this should not be interpreted as risk-free or ‘safe’.

Digital holdings

Cryptocurrencies aren’t generally considered a legitimate form of money, according to the Bank of England. Rather, they are typically held as investments.

And it is only since September 2024 that these digital holdings could be considered as personal property under UK law, following the introduction of the Property (Digital Assets etc) Bill.

The government said this legislation was designed to give cryptocurrency owners legal protection against fraud and scams, while helping judges deal with complex cases where digital holdings are disputed or form part of settlements, for example in divorce cases.

This timely development comes in light of data showing a 48% increase in the number of fraud cases and warnings that scammers’ tactics are rapidly evolving in a bid to exploit any security weaknesses. According to the research, the most common type of fraud is document forgery, followed by phishing, money laundering and account takeover.

Tax considerations

While the government, in tandem with the FCA, is focusing policy and regulatory efforts on controlling these cryptocurrency risks, some commentators have suggested that it will also be ramping up compliance activity when it comes to taxation of cryptoasset gains. Indeed, from the 2024/2025 tax year, tax returns include a dedicated section for reporting crypto gains.

Generally speaking, when cryptoasset exchange tokens are sold, exchanged or given away then there could be a requirement to pay Capital Gains Tax if the gains take you over your tax-free allowance of £3,000. There are complexities involved in calculating your liabilities, making it advisable to keep accurate, full and up-to-date records for all transactions.

Separately, where large amounts of crypto are being traded, or if HMRC judges that other ‘exceptional circumstances’ apply, then income tax could apply to earnings. Income tax can also apply to activities such as mining and staking.

It is estimated that investors failing to declare crypto gains could be costing the UK government between £500 million and £2.5 billion of lost revenue. This provides important context to the incoming Crypto-Asset Reporting Framework, which aims to empower HMRC with enhanced data to help identify and enforce tax non-compliance.

Developments such as this highlight the fast-moving and dynamic nature of the crypto market. While this might be part of its appeal, it also underlines the importance of fully understanding what’s at stake, ensuring you have a complete picture of the risks, the implications for your tax position, and the impact it might have on your wider financial plans.