You might wonder which vehicle is best to hold a small slice of your portfolio in crypto. This is a legitimate question, because the choice you make fundamentally shapes the nature of your investment, the level of control you have over the asset, and, importantly, the tax obligations that come with it. Even a modest allocation can introduce complexities that are easy to overlook if you only focus on potential returns.

Every option carries different responsibilities and implications. Some approaches may be simpler to manage operationally, while others may offer more control and flexibility, but require additional effort and vigilance. From HMRC reporting requirements for disposals and swaps to Income Tax on staking rewards or other crypto earnings, even a small portion of your portfolio can trigger obligations that need careful attention.

The question is therefore very concrete: what exactly are you buying, and what tax obligations will it bring? Are you primarily seeking exposure to the price of a cryptocurrency, or do you want full access to use it within the crypto ecosystem? Your answer determines not only the type of account or platform you might choose but also how much effort you will need to dedicate to tracking, reporting, and ensuring compliance.

Understanding this upfront is crucial. Even if the amount you invest is small, making the wrong choice could lead to unnecessary operational burden, unexpected tax complexity, or exposure to risks you were not prepared for. Taking a moment to clarify your goals, the nature of the asset, and the responsibilities it entails can save time, reduce stress, and ensure your crypto investment fits seamlessly into your broader portfolio strategy.

What do you really own: cryptoassets or financial instruments?

The first distinction to clarify is the type of exposure you are acquiring. A financial instrument that tracks the price of a cryptocurrency is fundamentally different from owning the digital token itself. This distinction is crucial because it affects how you can use the asset operationally and how it is taxed under UK law.

Financial instruments via UK brokers

If you operate via a regulated UK broker, when you “buy crypto” you are often purchasing an Exchange-Traded Product (ETP) or Exchange-Traded Note (ETN). Some common examples include:

• BTCetc Bitcoin Exchange Traded Crypto (BTCE): an ETP that tracks Bitcoin’s price;

• 21Shares Ethereum ETP (AETH): an ETP tracking Ethereum;

• VanEck Vectors Bitcoin ETN (VBTC): an ETN giving exposure to BTC;

• CoinShares Physical Bitcoin (BTC): another regulated product for Bitcoin exposure.

These financial instruments are designed to replicate the price of the underlying crypto, but they do not confer ownership of the actual tokens. Operationally, they cannot be sent to a wallet, cannot interact with blockchain protocols and cannot participate in staking, lending, or other DeFi activities. From a tax perspective, disposals are treated as capital gains on financial instruments, and brokers may often provide statements to simplify reporting to HMRC.

Cryptoassets via exchanges or self-custody

When you buy tokens directly on a crypto exchange or via DeFi protocols, you are acquiring a cryptoasset as defined by HMRC. Popular examples include:

• Bitcoin (BTC): the most widely held and transferable cryptoasset;

• Ethereum (ETH): used for staking, DeFi, and smart contract interactions;

• Solana (SOL): among other major tokens commonly used in onchain applications;

• Uniswap (UNI), Aave (AAVE), Chainlink (LINK): tokens frequently involved in DeFi protocols.

These cryptoassets are transferable, meaning you can send them to any compatible wallet or smart contract. They can be used on-chain, enabling staking, lending, liquidity provision, or participation in governance. Custody becomes critical: if you do not control the private keys, you do not truly control the asset.

• On a centralized exchange, the platform manages the private keys for you; this is convenient, but exposes you to counterparty risk, as the exchange could face insolvency, hacks, or operational failures.

• Self-custody wallets (hardware wallets like Ledger or software wallets like MetaMask) give you full control of your tokens. This autonomy comes with responsibility: you must manage your private keys, protect your devices, and ensure security against loss or theft.

Operationally, the differences are clear:

• ETPs/ETNs via brokers: no wallet required, cannot stake or use on-chain, simple to buy and sell;

• tokens on exchanges: can stake, lend, or participate in DeFi; platform holds keys; operational and counterparty risks;

• self-custody wallets: full flexibility, full control of keys; all actions are your responsibility.

Security and access: broker, exchange, or self-custody

A regulated UK broker offers an environment designed for traditional financial instruments: FCA oversight, client fund segregation, and standard procedures. This is natural if buying an ETP or ETN, but it does not give access to the underlying cryptoasset. You cannot withdraw, transfer, or operate on-chain: you get price exposure, not token control.

On a crypto exchange, the logic changes. You are acquiring real cryptoassets: you can deposit, withdraw, send to a personal wallet, or interact with on-chain protocols. It remains a centralized environment, where the exchange controls the keys. Operationally convenient, but with counterparty risk.

Self-custody is the alternative without intermediaries. You hold the keys and decide how and where to use the tokens. This is the model closest to the nature of cryptoassets, but requires operational competence: seed phrase protection, device security, error management. Full control, full responsibility.

To summarize, it’s not just “broker vs exchange”. There are three distinct ways to hold the same portion of your portfolio:

• broker: regulatory safety, price exposure only;

• exchange: access to the asset, centralized custody risk;

• self-custody: full control, full responsibility.

Tax regimes compared: financial instruments vs cryptoassets

The distinction between financial exposure and cryptoasset ownership is immediately reflected in UK tax rules. Understanding the differences is crucial, even for a small portion of your portfolio, because the tax obligations, reporting requirements, and operational responsibilities vary significantly.

Financial instruments (ETP/ETN)

When you hold financial instruments that track crypto prices through a regulated UK broker, you remain in the financial instrument tax regime. In this context, taxation is generally straightforward:

• You do not need to report crypto holdings to HMRC, because the asset is treated as a conventional security.

• Income Tax is not due on holdings, unless the broker separately provides interest or dividends.

• Capital Gains Tax (CGT) applies only when you dispose of the financial instrument, not the underlying cryptocurrency.

You also have different options for managing reporting:

• while UK brokers provide comprehensive tax reports and Consolidated Tax Certificates (CTCs) that simplify your calculations, they do not withhold Capital Gains Tax on your behalf;

• If you hold these instruments in a General Investment Account (GIA), you are responsible for reporting any gains that exceed your annual allowance to HMRC via your Self Assessment tax return.

In all cases, your exposure is limited to price movements, without owning the underlying tokens, which simplifies both operations and tax compliance.

Cryptoassets (exchange or self-custody)

When you hold actual cryptoassets, either on a centralized exchange or in a self-custody wallet, you enter the cryptoasset tax regime, as HMRC treats these assets as property. This brings additional obligations:

• all disposals are subject to Capital Gains Tax (CGT). This includes selling crypto for GBP, swapping one cryptoasset for another, or spending crypto on goods or services;

• Income Tax may apply on any earnings, such as staking rewards, mining income, or tokens received as payment;

• you must keep accurate records, including the market value in GBP at acquisition and disposal, because HMRC expects detailed documentation for every transaction.

This regime is more complex because:

• each disposal or transaction can trigger a taxable event, even for small amounts;

• earnings from staking or other crypto activities are treated as income at the time of receipt, potentially creating multiple taxable events for the same asset;

• accurate historical records are required to calculate CGT and Income Tax correctly.

Even modest allocations can create obligations if transactions are frequent, and failure to comply may result in penalties ranging from 0% to 100% of unpaid tax, depending on whether errors were careless or deliberate.

CryptoBooks: your all-in-one compliance and portfolio control tool

Regardless of where you hold your small crypto allocation, consistency in data is key for Self Assessment:

• a broker produces one type of evidence (average prices, gains/losses, statements);

• an exchange produces another;

• adding a wallet fragments the information further.

The problem is not the number of operations, but how they accumulate over time. Even a small allocation can generate disconnected records: an ETP sale, an exchange deposit, a wallet transfer, an on-chain position. Doing this manually is a simple way to create discrepancies.

CryptoBooks eliminates this friction. After importing your brokers, exchanges, and wallets, it calculates all transactions according to HMRC rules and produces ready-to-file Self Assessment reports. No scattered spreadsheets. No manual reconstruction. This brings you back to the initial question: where to hold a small crypto allocation depends on your intended use, not on tax complexity. When your data is aligned, filing is just a technical step.

CryptoBooks allows you to choose the vehicle that fits your strategy without worrying about what happens at tax time. Create your free account today to automatically align your data and make your next HMRC Self Assessment effortless.