Many crypto investors are suffering as a result of the recent value decline. While many analysts believe the market will recover, with the current reduction in market value, it would be good to consider how such losses can be used to lower current and future personal tax payments.
How is crypto taxed?
First, it could be advantageous to examine how people are taxed on cryptocurrency to gain realization.
When cryptocurrency is exchanged, received as payment, mined (including the tax on fees made from the mining), or sent as airdrops in place of services, it is often subject to tax (or expected services). When one sort of cryptocurrency is traded for another, tax may also be owed.
When any cryptocurrency is sold, traded, or exchanged, capital gains tax is probably going to have to be paid. When you use cryptocurrency to purchase goods or services or when these are given away to another person, you can also be required to pay capital gains tax (other than a spouse).
If cryptocurrency was obtained as payment for a service or expected service, such as salary, through mining, or through an airdrop, income tax and national insurance contributions may also be owed. It's possible that inheritance tax will be owed after a person passes away, therefore planning for it should also be considered. On our site, you can read more about cryptocurrency taxes.
Offsetting crypto losses against gains
When cryptocurrency is subject to capital gains tax, losses can often be applied to future or upcoming tax years' gains.
From a tax perspective, just like with gains, any losses must first be realized by disposal, like transferring them (to an unrelated party) or selling them.
Any losses can, at the most basic level, be offset against profits generated within the same tax year. Suppose your total taxable gain exceeds the tax-free allowance after accounting for losses incurred in that tax year. In that case, you may be eligible to deduct any unused losses from prior tax years, provided you meet certain requirements. If they keep your gain inside the tax-free allowance, you can carry any further losses to the future tax year.
Losses on chargeable assets like cryptocurrency should be reported to HM Revenue and Customs (HMRC) to lower your overall taxable earnings. Losses that are used in this manner are referred to as acceptable losses.
Note that all profits or losses realized through the sale of any chargeable assets within the applicable tax year should be taken into account for determining losses or gains for capital gains tax purposes. This means that in addition to cryptocurrency, property other than your primary residence (or your primary residence if it has been rented out or utilized for business), any shares, and specific personal effects should be taken into account when calculating capital gains.
Reporting crypto losses to HMRC
Losses may be claimed by noting them on a tax return for self-employment. A loss can be reported to HRMC in writing if you haven't made any gains and aren't registered for self-assessment.
Such losses are exempt from immediate reporting to HMRC and may be claimed up to four years following the end of the tax year in which the asset was sold.
Losses incurred prior to April 5, 1996, may still be claimed, but they must be subtracted after any losses that occurred more recently.
Losses resulting from disposals to family members and other connected parties
The majority of the time, when assets are gifted or sold to a spouse or civil partner, capital gains tax is not due. These assets are not subject to loss claims.
Additionally, unless a gain is being offset from the same person, losses cannot be deducted when transferring, selling, or disposing of assets to family members. Any associated parties, such as coworkers or a business you own, are also subject to this restriction. (You may find the HMRC definition of related individuals here.)
Claiming for crypto that has lost its value
These losses may also be claimed if any owned cryptocurrency loses all of its value or only has a small amount left over. Cryptocurrency is treated as having an insignificant value for tax reasons if it is sold and then bought again at a certain price on a claim.
Similar to how shares are pooled, cryptocurrencies are. Therefore, a claim of negligible worth must be made for the entire pool and not just a certain cryptocurrency unit or token. If certain requirements are met, claims may also be backdated.
Claiming losses against crypto which has been lost
For the purposes of capital gains tax, losing ledger keys does not result in the loss of access to your cryptocurrency because the cryptocurrency is still in existence (and accordingly a loss cannot be claimed). However, a negligible value claim could be made if it can be shown that there is no chance of recovering the key and getting access to the crypto.
Industry-leading crypto tax advice
Our cryptocurrency tax consultants are available to assist clients in completely comprehending how cryptocurrency is taxed in the UK and how you can remain compliant in this quickly growing industry.
We can assist you in making sure your affairs are set up correctly, in the most tax-efficient way possible, and in compliance with the most recent HMRC cryptocurrency regulations, whether you're an investor, trader, or business.