Understanding Cryptoasset Losses

Cryptoasset losses occur when you sell a cryptoasset for less than the amount you originally paid for it. This is determined using the formula:

Sale Price – Cost = Capital Gain/Loss

If the result is negative, it indicates a loss. Only losses from selling (realised losses) can be claimed for tax purposes. This means you must have sold the cryptoasset to realise the loss. If the cryptoasset value has dropped but you have not sold it (unrealised losses), you cannot claim these losses for tax purposes.

Example of Cryptoasset Loss Calculation:

Suppose you purchased 1 Bitcoin for £10,000. If you later sell it for £7,000, your capital loss would be calculated as follows:

£10,000 − £7,000 = £3,000.

Here, you would have a realised loss of £3,000.  Please note this does not consider the s.104 pooling rules which we wrote an article regarding.

If you handle thousands of transactions each year, calculating your own capital gains can be extremely challenging. Be sure to consult a cryptoasset tax advisor or use cryptoasset tax software. Both the tax software and the advisor will need your complete trading history to accurately calculate the base costs and gains on the sale of your assets.

Tax Implications of Cryptoasset Losses

When you realise a loss by selling cryptoasset at a lower price than the purchase price, these losses are automatically used to offset other capital gains in the year, potentially reducing your overall tax liability.

Unrealised Losses

Unrealised losses occur when the value of your cryptoasset holdings declines, but you have not yet sold the asset. While these losses reflect a decrease in market value, they are not recognised for tax purposes until the asset is sold. For instance, if you bought Ethereum at £2,000 and it drops to £1,200 but you have not sold it, this £800 loss is unrealised and cannot be used to offset other gains or income on your tax return.

Strategies for Managing Cryptoasset Losses

Investors may use strategies like tax-loss harvesting to manage their tax liabilities. This involves selling cryptoassets that have declined in value to realise the losses, which can then be used to offset gains from other investments. After realising the loss, investors might repurchase the same or a similar asset, maintaining their investment position while taking advantage of the tax benefit.  However you need to take into consideration the s.104 pooling rules.

In summary, understanding cryptoasset losses and their tax implications is crucial for effective financial planning and can provide opportunities to minimise tax liabilities through strategic selling and buying of cryptoassets.

Time limits to claim losses

You have 4 years from the end of the tax year to claim any Capital Loss with HMRC.

Managing Cryptoasset Losses on Your UK Tax Return

If you have incurred losses from your cryptoasset investments, you can claim them on your UK tax return to potentially reduce your tax liability.

Offset Losses Against Gains:
  • You can offset your capital losses against any capital gains you have made within the same tax year. This can reduce your taxable gains down to the Capital Gains Tax (CGT) personal allowance, minimizing your tax liability.
Carry Forward Excess Losses:
  • If your capital losses surpass your capital gains, you can carry forward the excess losses to offset gains in future tax years. This can be beneficial if you expect to have capital gains in the coming years.
Register Losses with HMRC:
  • Complete a Self-Assessment tax return, where you can declare your losses and gains.
  • Alternatively, you can send a formal written notification to HMRC, detailing your losses.
  • This must be done within four years of the end of the tax year in which the loss occurred.
  • Ensure you provide all necessary supporting calculations and documentation to substantiate your losses.
Adhere to CGT Rules:
    • Ensure compliance with specific rules to avoid penalties.
    • Same-Day Rule: If you sell and then buy back the same cryptoasset on the same day, this transaction must be treated as a single event for CGT purposes.
    • 30-Day Rule: Known as the “bed and breakfasting” rule, if you sell an asset at a loss and buy it back within the next 30 days, the loss may not be allowable for CGT purposes. This rule is in place to prevent tax avoidance strategies.
Additional Tips:
  • Record-Keeping: Maintain detailed records of all your cryptoasset transactions, including dates, amounts, values, and the purpose of each transaction. This will help when calculating gains and losses and when providing evidence to HMRC.
  • Professional Advice: Consider consulting a tax professional or accountant who is familiar with cryptoasset taxation to ensure that you are following the correct procedures and maximizing your tax benefits.
  • Stay Updated: Tax laws and regulations regarding cryptoassets can change, so it is important to stay informed about the latest rules from HMRC.

By following these steps and adhering to UK tax laws, you can effectively manage your cryptoasset losses and potentially reduce your overall tax liability.

Types of Cryptoasset Losses You Can Claim

Realised Losses: When you sell cryptoasset for less than its purchase price, this results in a realised loss. You can claim this loss on your tax return, which can help offset other capital gains and potentially reduce your overall tax liability. It is crucial to maintain detailed records of all transactions, including purchase prices, sale prices, and dates of transactions.

  • Lost or Stolen Crypto: HMRC does not consider lost or stolen cryptoassets as capital losses since you technically still own them. However, if you can demonstrate a permanent loss of access to these assets, you may be eligible to file a negligible value claim. This claim can help offset future gains. Documentation proving the loss of access is essential.
  • Frozen Funds: In cases where your cryptoasset funds are frozen due to events like bankruptcy proceedings (such as the FTX situation), you cannot claim these losses immediately. You must wait for the conclusion of the proceedings. If the funds are deemed unrecoverable at the end, you can file a negligible value claim to offset future gains.
  • Rug Pulls: In a rug pull scenario, developers abandon the project, leaving you with worthless tokens. To claim a loss, you need to dispose of these tokens through various methods:
    • Sell the tokens on exchanges if they are still listed.
    • Swap the tokens for another cryptoasset.
    • Gift the tokens to someone other than your spouse.
    • Burn the tokens by sending them to a designated burn wallet.
    • If the blockchain supporting these tokens halts, you might need to file a negligible value claim.
  • Worthless NFTs: To claim a capital loss on worthless NFTs, you need to dispose of them. Here are some methods:
    • Sell the NFT on a marketplace, even if the sale price is minimal.
    • Gift the NFT to someone other than your spouse.
    • Burn the NFT using platform options to delete it permanently.
Assistance

This article does not cover everything you need to be aware of.  If you require any further information or assistance with any cryptoasset losses you have please contact us.  A member of our team will be happy to help.

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