Crypto losses – claiming tax relief to reduce current and future tax bills
Crypto losses resulting in the current downturn in value is affecting many crypto investors. Whilst the view of many commentators is that the market will rebound, with the current drop in value in the market, it would be prudent to review how such losses can be utilised to reduce current and future personal tax bills.
How is crypto taxed?
Firstly, it may be of benefit to review how individuals are taxed on gains realised from crypto.
Crypto is typically liable for tax when it is traded, received as payment, mined (including tax on fees earned from the mining) or received as airdrops in lieu of services (or expected services). Tax can also be due when a cryptoassets are exchanged for another type of cryptoasset.
Capital Gains Tax is likely to be liable to be paid when any cryptocurrency is disposed of, traded, or exchanged. You could also be liable to pay Capital Gains Tax when you use cryptocurrency to pay for goods or services or where these are given away to another person (other than a spouse).
Income Tax and National Insurance contributions may also be due where cryptoassets have been received as a salary, through mining or through Airdrops in return for a service or expected service. Inheritance Tax could also be due upon death, so Inheritance Tax Planning should also be taken into account. You can read more on how crypto is taxed on our here.
Offsetting crypto losses against gains
Where crypto is taxable as a capital gain, losses can typically be offset against gains in the same, or potentially future tax years.
As is the case with gains, from a tax point of view, to utilise any losses, they first need to be realised through a disposal, such as transferring them (to an unconnected party) or through a sale.
At its simplest level, any losses can be offset against gains made in the same tax year. If your total taxable gain is above the tax-free allowance after factoring in losses made in that tax year, unused losses from previous tax years can also be deducted, subject to certain conditions. If they reduce your gain within the tax-free allowance, any remaining losses can be carried forward to a future tax year.
Losses on a chargeable asset, such as crypto should be reported to HM Revenue and Customs (HMRC) to reduce your total taxable gains. When losses utilised in this way, they are known as allowable losses.
Note that when calculating losses or gains for capital gains tax purposes, all gains or losses realised through a disposal of any chargeable assets should be considered together within the relevant tax year. This means that alongside crypto, property that is not your main home, (or your main home if it has been let out or used for business), any shares and certain personal possessions should be considered when making a capital gains calculation.
Reporting crypto losses to HMRC
Losses can be claimed by reporting it on a Self Assessment tax return. If you are not registered for Self Assessment and never made a gain, a loss can be registered with HRMC by writing to them.
Such losses do not need to be reported to HMRC straight away, a claim can be made up to four years after the end of the tax year in which the asset was disposed of.
If a loss was made before 05.04.1996, these can still be claimed for, however, these must be deducted after any more recent losses.
Losses resulting from disposals to family members and other connected parties
Capital Gains Tax is usually not paid when assets are given or sold to a spouse or a civil partner. Losses cannot be claimed against these assets.
Furthermore, losses also cannot be deducted from giving, selling or disposing assets to family members, unless a gain is being offset from the same person. This rule also applies to any connected people, such as business partners or a company which you control. (HMRC’s definition of connected persons can be found here).
Claiming for crypto that has lost its value
If crypto that is owned becomes worthless or of negligible value, these losses can also be claimed. A negligible value claim considers crypto for tax purposes as being disposed of and reacquired at a specified amount on a claim.
Crypto is pooled in the same way that shares are. Therefore, a negligible value claim needs to be made in respect of the whole pool, not an individual crypto unit or tokens. Claims can also be backdated, subject to certain conditions being met.
Claiming losses against crypto which has been lost
If you lose ledger keys and cannot access your crypto, this does not count as a disposal for Capital Gains Tax purposes as the crypto still exists (and accordingly a loss cannot be claimed). However, if it can be illustrated that there is no prospect of recovering the key and accessing the crypto, a negligible value claim could be made.
Industry-leading crypto tax advice
To fully understand how crypto is taxed in the UK, and how you can stay compliant in this rapidly evolving sector, our cryptocurrency tax advisors are here to help clients.
Whether you’re an investor, trader or a business, we can help you ensure your affairs are structured correctly, in the most tax-efficient way, while remaining compliant with the latest HMRC cryptocurrency legislation.
To contact a member of our cryptocurrency tax team, email email@example.com or simply fill out the contact form below and we will be in touch.