Cut your HMRC Tax Bill by Using Crypto Losses
From plummeting prices to exchanges collapsing, it’s been a wild ride for Britain’s crypto investors. So in the current bear market, if you’ve got losses – you’re not the only one. But even in the bleakest of crypto winters, there comes a small silver lining in the form of your tax bill. HMRC allows UK crypto investors to offset crypto losses in order to slash their tax bill. Crypto tax calculator, Koinly, explains the lie of the land.
Since the bear market took hold, crypto investors worldwide have lost an estimated $2 trillion. That’s even without factoring in the billions in losses relating to hacks and rug pulls, as well as the yet realized losses relating to the collapse of crypto platforms like Celsius, FTX Group, and more.
But there might be an upside yet – because HMRC allows investors to offset their losses against their gains and reduce their overall tax liability. Let’s break it down.
Crypto Tax 101
Any time you sell, spend, swap, or gift (excluding to your spouse) crypto, HMRC views this as a disposal and any gain is subject to Capital Gains Tax, while any loss can be offset against gains to reduce your tax bill.
HMRC doesn’t tax all your gains. Every taxpayer in the UK gets what’s known as a personal CGT allowance of £12,300 each year currently. You can utilise capital losses from investments to bring you back down to your allowance amount.
But – in the Autumn Budget, the Chancellor announced that the CGT allowance was being cut for the 2023/24 and 2024/25 financial years. In the current 2022/2023 financial year, you’ll still benefit from the full current £12,300 allowance. But, from April 2023, this figure gets slashed in half to a £6,000 allowance and halved again in April 2024 to £3,000.
What are the rules on capital losses?
HMRC has some important rules to consider when it comes to capital losses:
- There is no limit to the number of capital losses you can offset against gains. So you can offset as large a capital loss as you need to to reduce your gains down to the CGT personal allowance figure.
- If you have no gains to offset your losses against, you can also carry forward losses to future financial years in order to offset them against future gains.
- If you want to carry forward losses, you must register them. You can register losses by submitting a Self Assessment tax return, or notifying HMRC in writing off your losses.
- You have four years to register your losses with HMRC, otherwise, you cannot carry them forward.
- Investors should also be aware of the same-day and 30-day CGT rules. These exist to stop investors from manipulating the Section 104 share pooling cost basis method by creating artificial losses by purposefully selling assets at a loss and then buying them back, in order to gain a tax advantage.
With the rules out the way, let’s take a look at how best to track, harvest, and offset your losses to reduce your tax liability.
Track, harvest & offset losses
A key point – you need to realise your losses in order to offset them.
When you’ve disposed of your asset by selling, swapping, spending, or gifting it and made a loss, you have a realised loss. Meanwhile unrealised losses refer to a crypto asset that has decreased in value, but you’ve not yet realised your loss as you haven’t disposed of your asset.
One of the best strategies for investors is to track and harvest losses deliberately, in order to reduce their tax liability.
Most crypto investors use a crypto portfolio tracker to do this. This allows them to view the original cost basis of their asset (how much they bought it for plus any allowable costs), the current market price, and their ROI to see how their asset is performing.
In more favourable market conditions, this allows investors to identify investments that are underperforming in their portfolio and dispose of them by selling, swapping, spending, or gifting them, in order to realise a loss which they can then offset against gains. In the current market conditions, tracking your portfolio performance also allows you to see when to bail a sinking ship.
Of course, there are some instances where you’ll have unrealised losses that aren’t quite as clear how to deal with – for example, illiquid NFTs, worthless tokens from rug pulls, funds frozen in crypto exchanges, and losses from theft. There’s a mixed bag of good and bad news from a tax perspective, depending on the specific circumstances, so we’ll look at each.
If you bought an NFT in the hype and you’re now stuck with a virtually worthless asset that you can’t sell on or swap… it’s not all bad news. These NFTs actually present a huge tax loss harvesting opportunity for many investors.
Innovative market projects like Unsellable NFTs allow you to dispose of these NFTs to realise your loss. Once you’ve realised it, you can offset it against any gains over the personal CGT allowance, or carry it forward to future tax years.
Rug pulls were rife in 2022, particularly in the DeFi market and they present a similar problem to investors as to how to realise their losses, as without doing so, they’re unable to offset them. There are a few options here on how to realise your loss, depending on whether the coins are still circulating or not:
- Sell your tokens on an exchange
- Use a native non-custodial wallet to swap your tokens
- Dispose of your tokens by gifting them (not to your spouse)
- Send your tokens to a burn address
- If the blockchain entirely halts transactions permanently, you may be able to make a negligible value claim with HMRC which you can later offset against your gains.
From Celsius to BlockFi to FTX – hundreds of thousands of UK crypto investors have assets frozen on platforms that have now begun bankruptcy proceedings.
In this case, the news isn’t good. You’re unable to realize and offset your loss, and as there’s a small potential you may recover some of your funds, HMRC is unlikely to allow a negligible value claim.
Unfortunately, the best thing investors can do is sit tight and wait for the proceedings to finish. In a best-case scenario, investors may see some of their funds returned. However, if they don’t, they may then be able to finally make a negligible value claim which you can later offset against your gains.
Lost & stolen crypto
Had crypto stolen or lost your private key? It’s bad news again.
HMRC doesn’t view this as a capital loss as you haven’t disposed of your tokens. But, if you can prove you have permanently lost access to your crypto, you may be able to make a negligible value claim with HMRC which you can later offset against your gains.
Reduce your tax bill with our partner Koinly
Our crypto tax partner, Koinly, helps you track your crypto portfolio performance to track, harvest, and realise your losses – helping you lower your HMRC crypto tax bill. Better still, Koinly calculates your crypto tax liability for you and generates an HMRC crypto tax report to make crypto tax simple.