How are crypto losses taxed in the UK?

Introduction

In the UK, crypto losses are subject to tax implications that investors must be aware of. Understanding how these losses are taxed is essential for managing your finances and complying with tax regulations. In this blog, we will cover

Understanding Crypto Losses for Taxes

Let’s start with the basics: a ‘loss’ happens when you sell your cryptocurrency for less than what you paid. While the crypto world can be unpredictable, with prices going up and down, you can use these losses to help with your taxes.

How to Claim Your Losses

There are a few ways to claim your crypto losses:

Sell or Get Rid of Your Crypto

To count as a loss, you must have sold your crypto or gotten rid of it somehow. Just seeing its value go down on your screen doesn’t matter.

Tell HMRC

You need to report any losses when you do your taxes through a Self Assessment tax return. It’s really important to keep track of all your transactions, including when they happened, how much they were worth in pounds, and what kind of crypto it was. HMRC wants to know all the details.

Use the Loss to Lower Your Taxes

If you’ve made money on some investments but lost money on others, you can use the losses to balance the gains. This could mean you pay less in taxes.

Time Limit

You have four years from the end of the tax year when you made the loss to report it. You must wait too long to be able to use it to help with your taxes.

Keep Good Records

It’s super important to keep all your documents, like receipts from buying and selling crypto, wallet addresses, and how much everything was worth. This isn’t just for being organised; it’s necessary for tax reasons.

Finding the Silver Lining

Even though nobody likes losing money, there’s a positive side: tax relief on those losses. You can make the best of a bad situation with intelligent planning and understanding of the rules. It’s about looking ahead and knowing how to use these rules to benefit you in the long run.

Understanding Different Types of Crypto Losses

When dealing with cryptocurrencies, you might face various situations where you lose money. Here’s a simple explanation of the main types of losses you might encounter:

Capital Losses

This is the most straightforward type of loss. If you sell your crypto for less than you bought it, that’s a capital loss. It’s a clear-cut case of spending more to buy crypto and getting less when you sell it.

Theft Losses

In the digital world, theft can happen just like in the real world. If someone hacks your account or you fall victim to a scam and lose your crypto, this counts as a loss. Proving theft to the tax authorities (HMRC) requires solid evidence and accurate valuation of what you lost.

Loss of Access

Sometimes, you might lose access to your crypto not because someone stole it, but because you forgot your password or a device failed. This kind of loss is tricky because you need to prove to HMRC that you can’t access your crypto anymore.

Exchange or Wallet Closure Losses

If the platform where you keep your crypto shuts down or goes out of business, and you can’t get your crypto back, this is another type of loss. It’s like having your treasure chest sunk to the bottom of the ocean.

Each type of loss has its own rules for how you can claim it on your taxes. The most important thing is to keep detailed records of everything and understand HMRC’s rules on claiming these losses.

Realised vs. Unrealised Losses: What You Need to Know

In the crypto world, losses come in two flavours: realised and unrealised. Knowing the difference is crucial for managing your investments and taxes.

Realised Losses

These are losses from selling your crypto for less than its purchase price. For example, if you buy crypto for £1,000 and sell it for £700, you’ve realised a £300 loss. This is the kind of loss you can report to HMRC to lower your tax bill potentially, as it’s a concrete financial event.

Unrealised Losses

Unrealised losses are when the market value of your crypto drops below what you paid, but you still need to sell it. If your £1,000 investment is now worth £700 but it’s still in your wallet, that’s a £300 unrealised loss. It’s a loss on paper since you haven’t turned it into an actual transaction by selling.

Why It Matters

The distinction is important for tax purposes. HMRC allows you to report realised losses, which can offset other capital gains and reduce your taxes. Unrealized losses, being theoretical unless you sell, don’t count for tax relief.

Deciding when to turn an unrealized loss into a realised one can be strategic. It involves selling assets at the right time to optimise your tax situation, considering market trends and your financial objectives.

Claiming Realised Losses on Trading Activity

When trading cryptocurrencies, if you sell for less than your purchase price, HMRC lets you offset these losses against any profits elsewhere, potentially reducing your tax bill.

To claim, accurately report these losses on your Self Assessment tax return, including trade dates, values in GBP, and the cryptocurrency type. Detailed record-keeping is essential for HMRC validation. Strategic loss claims can comply with tax regulations and lower your tax obligations.

Claiming Losses on Lost or Stolen Crypto

If your cryptocurrency is lost or stolen, HMRC allows you to claim a loss, acknowledging the financial and emotional distress it can cause. To claim, you must convincingly prove the cryptocurrency is permanently gone, such as evidence of a failed digital wallet, irrecoverable access, or unauthorised access to your crypto.

Maintain and provide detailed records, including police or exchange reports, to support your claim. On your Self Assessment tax return, accurately detail the loss amount and circumstances.

HMRC rigorously checks these claims to ensure only genuine cases receive tax relief, helping preserve the tax system’s integrity and offering some relief for affected individuals. While claiming doesn’t replace your lost assets, it can mitigate the financial impact by potentially reducing your tax bill.

Claiming Losses on Frozen Funds

When your cryptocurrency funds are frozen due to issues with exchanges, legal matters, or disputes, you may face difficulty accessing your assets. The UK’s HMRC allows for claiming these inaccessible funds as losses on your tax return, given you meet specific criteria.

To successfully claim a loss on frozen funds, you must demonstrate that your funds are permanently inaccessible, not just temporarily unavailable. Necessary evidence includes communication with the exchange or wallet service, relevant legal documents, and documentation of your attempts to recover the funds.

On your Self-assessment tax return, detail the loss amount, the date you lost access, and the specifics. HMRC requires solid proof to accept your claim, reviewing each case on its merits.

Claiming losses on frozen funds can potentially lower your tax bill, providing financial relief. Maintaining thorough records and consulting a tax professional can navigate this complex process more effectively.

Claiming Losses on Rug Pulls

Rug pulls, a scam where crypto project developers flee with investors’ funds, leaving them valueless, can be a harsh reality in the cryptocurrency market. In the UK, victims of rug pulls may have the option to claim these losses on their taxes, potentially mitigating the financial impact.

To file a claim for a rug pull loss with HMRC, it’s essential to demonstrate the complete loss of value in your investment due to the scam. Proper documentation, including your investment records, evidence of the rug pull (such as news articles or social media posts), and any interactions with the developers, is critical.

When completing your Self Assessment tax return, accurately detail the amount lost, the date of the rug pull, and a comprehensive description of the incident. A well-documented claim is vital, as the complexity of rug pulls poses challenges for tax claims, necessitating clear proof of the loss.

Claiming this loss can acknowledge the financial setback and reduce your tax liability. The process underscores the inherent risks of crypto investments. For those considering such a claim, meticulous record-keeping and possibly seeking advice from a tax professional are advisable to navigate the complexities effectively.

Claiming Losses on Worthless NFTs

NFTs (Non-fungible Tokens) can be exciting but risky investments. Sometimes, they might lose most or all of their value, leaving investors with essentially worthless assets. In the UK, you might be able to claim these losses on your taxes, which could offer some relief.

You’ll need to follow HMRC’s guidelines closely to claim an NFT that’s lost value. You have to prove that the NFT has lost its value and that you can’t sell it for a reasonable price. This might be tough since the value of NFTs can be pretty subjective.

Here’s what to do:

Gather Evidence

Keep all records of how much you paid for the NFT, attempts to sell it, and any proof that it’s no longer worth anything. This might include listing it on marketplaces without getting any reasonable offers.

Report the Loss

On your Self Assessment tax return, detail how much you’ve lost, when you bought the NFT, and when it became clear that it was worthless. It’s important to explain clearly why the NFT is now valueless.

HMRC’s Review

HMRC will scrutinise your claim, case by case. They’ll decide if your loss can be used to reduce your taxes based on the evidence you provide.

Claiming a loss on an NFT requires a solid case, mainly because the value of digital art and collectables can change quickly. If you’re going through this process, getting advice from a crypto tax expert might help ensure your claim is as strong as possible.

What Costs Can Be Claimed?

When dealing with losses from cryptocurrencies or NFTs, there are specific costs HMRC lets you claim. These can help lower your tax bill by accurately showing how much you’ve really lost. Here’s a quick overview:

• Acquisition Costs: This includes what you originally paid for the crypto or NFT and any fees from buying them.
• Transaction Fees: If you paid fees to make transactions happen, like network or gas fees, you can add these to your costs.
• Professional Fees: Money spent on legal advice, tax help, or valuation services related to your investment might be claimable.
• Improvement Costs: Rarely, if you’ve paid to increase an NFT’s value (not just maintain it), those costs could count.
• Disposal Costs: Fees for selling or transferring your crypto or NFT are deductible.
• Marketing Costs: Those expenses might be deductible if you’ve spent money trying to sell your NFT or crypto.

Remember, what you can claim depends on the situation and HMRC’s current rules. Keeping detailed records and talking to a tax expert can ensure you’re doing everything right.

Carrying Forward Crypto Losses

Crypto losses can be carried forward in the UK. If your crypto losses exceed your gains in a given tax year, you can carry the unused losses to future tax years to offset against future capital gains. If you don’t have sufficient capital gains in the current tax year to utilise all your losses, you can apply these losses to reduce your tax liability in future years when you might have higher capital gains.

To carry forward losses, you must first report them on your Self-assessment tax return for the year the loss occurred. Once registered and HMRC recognises the loss, it can be carried forward indefinitely until you have capital gains against which the losses can be offset.

Carrying Backward Crypto Losses

Unlike carrying forward, the UK tax system generally does not allow individuals to carry backward crypto losses to set them against capital gains from previous tax years. The tax treatment for capital gains and losses is primarily forward-looking, meaning you can only offset losses against profits in the same tax year or carry them forward to future tax years.

Exceptions and Considerations

While the general rule is that crypto losses cannot be carried backwards, there are specific circumstances and tax reliefs where losses might be treated differently, such as terminal loss relief in the case of a business.

However, for individual investors dealing with capital gains tax on crypto assets, these exceptions typically do not apply.

Strategic Use of Losses

Knowing how to strategically use losses can be an essential part of tax planning. For example, suppose you anticipate higher gains in the future or are approaching the end of the tax year with unused losses. In that case, understanding these rules can help you plan your disposals and optimise your tax position.

Optimising Crypto Losses for Tax Relief in the UK

In the UK, navigating the complexities of crypto losses for tax purposes requires understanding and strategic planning.

Whether you’re dealing with capital losses, theft, lost access, or the collapse of exchanges and wallets, the key is detailed documentation and timely reporting through your Self Assessment tax return. Realised losses can offset capital gains, potentially reducing your tax bill.

Evidence of the loss’s legitimacy is crucial for specific scenarios like rug pulls or worthless NFTs. Consulting with a crypto tax professional can ensure compliance and optimise your tax strategy, leveraging losses to your financial advantage.