During the pandemic years, the world of cryptocurrencies and digital investments reached dizzying new heights in both popularity and monetary value. Everyone from serial entrepreneurs to first time investors pondered whether to dabble in the high risk / high reward (and often very misunderstood) world of ‘crypto’. It is estimated that 5% of the UK population currently hold some form of cryptocurrency (Cybercrew, 2022).
The world of crypto however, is not for the faint-hearted. In its relatively short history, trends have shown the market is either boom or bust. At the date of writing this article, for many, it is currently bust. As investors lose confidence in the crypto sector, there are a number of tax implications to be aware of when it comes to crystalising losses. HW Fisher’s Tax team outline what to think about when it comes to disposing of a crypto asset and how to maximise tax efficiencies in doing so.
Calculating Gains or Losses
For most investors a disposal of a crypto asset will mean a sale – however, investors should also be aware that exchanging crypto assets, using crypto assets as a form of payment for goods or services, or giving away crypto assets may also be treated as disposals for tax purposes.
After recognising a disposal has been made the first step is to calculate your gain or loss. Where you are selling crypto assets, this is calculated by taking your sales proceeds less your original cost for the asset less any transaction fees that you have paid.
If you are not selling your entire holding of a crypto asset then your original cost should be calculated by taking a relevant proportion of your asset pool cost on weighted average basis.
Crypto investors should also be aware of the same day and 30-day bed and breakfasting rules when calculating their capital gains and losses.
Serial investors with multiple transactions may want to consider subscribing to a platform which tracks investment activity and calculates gains and losses automatically in real time.
For most individuals, disposals of crypto assets will be subject to Capital Gains Tax (‘CGT’).
If an individual’s total capital gains for a tax year are below £12,300 (currently) they will not pay any CGT as the gains will be covered by their annual CGT exemption.
If a loss is calculated on the disposal, this loss will be a capital loss. Capital losses are automatically offset against any capital gains made in the same tax year. This is regardless of whether your capital gains are below the annual CGT exemption.
CGT is currently charged at 10% on capital gains if your combined income and taxable gains are less than £50,270. CGT is charged at 20% for any excess above this figure. Utilising capital losses is therefore potentially worth a 20% tax saving.
If you do not have any capital gains in the same tax year as your capital loss – or your capital losses exceed your capital gains – then the excess capital losses will be carried forward and utilised against your first available taxable capital gains (after the use of your annual CGT exemption).
Capital losses do not expire – therefore it may be worth considering crystalising crypto losses now if you anticipate future capital gains elsewhere.
However, an issue arises if, for example, you make capital gains in the tax year prior to crystalising capital losses. These losses cannot be carried back against prior year gains. In a scenario like this reliefs such as EIS deferral (if you have made a recent EIS investment) may enable you to defer gains into a future tax year. In the meantime, whilst the gain is deferred, you may have made capital losses which could be used to offset the deferred gain when it comes back into charge.
The key takeaway here is that timing and forward planning are essential considerations when realising both capital gains and capital losses so that crystallising events are structured in a tax efficient manner.
The rules are very similar for limited companies when it comes to investments in crypto assets. Capital losses will be available for assets sold at a loss and will be utilised against same year capital gains or carried forward.
Capital losses for companies will save Corporation Tax, currently at 19%.
Trading In Crypto Assets
If you or your company trade in crypto assets (rather than investing) then there are more options for utilising losses on sales of crypto assets. However, HMRC have placed a high threshold to be deemed to be trading rather than investing in crypto assets so professional advice should be sought.
A personal trader who makes an overall net loss for a tax year has three options for utilising their loss.
Option 1 (which is automatic) is to carry forward the trading loss and utilise it against their first available trading profits. This will save Income Tax at your marginal rate.
Option 2 is to set the loss sideways against other non-trading income in either the tax year of the loss or the preceding tax year. The maximum loss that can be set sideways in any given tax year is £50,000 or 25% of your total income (whichever is higher). This will also save Income Tax at your marginal rate.
If after option 2 you have sufficient unused losses then option 3 can be claimed. This is where you can offset the trading loss against capital gains, in the tax year of loss or the preceding tax year. This will save Capital Gains Tax at either 10% or 20% – which is likely to be less efficient than options 1 or 2.
Options for relieving a trading loss in a limited company differ slightly so professional advice should be sought.
Should you have any questions with the above please speak to Adam Bonell or Ben Holman who will be happy to assist.