With the values of crypto assets receding from the heady heights of 2021, and with some high-profile crypto exchange failures such as FTX and Celsius, some investors will be left with realised or unrealised capital losses. In this article, we set out the tax treatment of these losses for UK resident individuals, along with some potential planning options.
Do you have to pay tax on crypto gains?
HM Revenue & Customs (HMRC) considers crypto assets to be within the scope of capital gains tax (CGT) for UK resident individuals. A disposal of crypto assets will therefore trigger a gain or loss, with disposals including sales, crypto-for-crypto exchanges, spending crypto on goods or services, gifts, or in some cases even lending crypto assets to others. In the majority of cases, those gains will be chargeable to CGT rather than to income tax.
The gain or loss on the disposal of a crypto asset is calculated by translating the proceeds and original cost into sterling at the relevant dates. These may involve a chain of conversions, such as Ethereum to US Dollar to sterling. The sterling value of certain costs of acquisition or disposal may also be deductible from the gain, and pooling rules apply for ‘fungible’ crypto assets, such as Bitcoin or Ethereum tokens.
Gains and losses are only realised by disposals; the UK does not charge unrealised gains or allow unrealised losses.
Can you claim for crypto losses?
There are no special rules regarding the use of crypto asset capital losses; the general CGT loss rules apply. Capital losses are first set against capital gains realised in the same tax year, until the point where the remaining gain is covered by the individual’s available CGT annual exempt amount. The balance of unused losses is carried forward indefinitely for use against capital gains in future tax years. The key point to note is the losses cannot be carried back to previous tax years. Therefore, an individual who realised gains in 2021-22 and losses in 2022-23 is not able to set these off against each other.
Capital losses realised on crypto assets are not eligible to be set against income.
If an investor has a choice as to when to realise a loss, they should consider the magnitude and type of any chargeable gains they have made in the current tax year or may make in future tax years. For example, if an investor has already realised current year gains qualifying for business asset disposal relief (subject to CGT at 10%), but expects to realise a chargeable gain on a residential property in the next tax year (subject to CGT at up to 28%), they may choose to delay realising the loss until that next tax year, so that they can maximise the tax benefit obtained from the loss. This decision will need to be made on a case-by-case basis.
Negligible value claims (NVCs)
It may be possible to make a claim to realise a capital loss without having disposed of the asset in question if the asset has become of negligible value during the period it’s owned. This is treated as a disposal and immediate reacquisition of the asset at nil base cost.
When considering crypto assets specifically, our view is that a NVC may be possible in the event of exchange failure, where there is no expectation of being able to access or retrieve your tokens held on that exchange. We know that it can be difficult to obtain the information required to calculate your losses from failed exchanges, so we can help construct these calculations from whatever information is available to you.
Another scenario which could lead to a NVC would be the permanent loss of the private key to a wallet with no prospect of recovering this.
In HMRC’s guidance they’ve stated that crypto assets lost as a result of fraud are not eligible for a NVC, as the original owner still owns the stolen asset and has a right to recover it.
We note that determining negligible value can be subjective. NVCs are likely to be scrutinised by HMRC and if the inspector does not consider the asset to have become of negligible value, the claim may be denied.
Many blockchains are equipped with a ‘burn address’, which is an inaccessible address and effectively removes compatible crypto assets sent to it from circulation. It’s not possible to withdraw or retrieve any crypto assets sent to a burn address.
If you wish to crystallise losses on assets that you consider worthless (and you don’t think they’ll increase in value in the future), you may choose to send them to the appropriate burn address. This strategy is typically used with illiquid and unwanted non-fungible tokens (NFTs). As sending an asset to a burn address is a disposal, there’s no need to rely on a potentially subjective NVC.
UK resident but non-domiciled individuals
HMRC’s view is that the situs of crypto assets that are not digital representations of underlying assets, follows the tax residence of the beneficial owner. This includes most common cryptocurrencies.
For UK resident but non-domiciled individuals taxed on the remittance basis, this means that capital losses realised on those crypto assets will be allowable UK losses and not affected by a foreign loss election (or lack thereof).
We note that HMRC’s view has not yet been tested in the courts and there’s no specific legislation governing the situs of crypto assets, so this treatment may be subject to change in the future.
Do you need to report on crypto losses?
If you have realised capital losses, the method of reporting these to HMRC will depend on whether or not you’re required to file a self-assessment tax return for the tax year of the loss.
If you’re required to file a return, the losses should be included on the SA108 capital gains pages in the “Other property, assets and gains” boxes, with a calculation attached. As announced in the Spring Budget 2023, from the 2024-25 tax year onwards, crypto assets will have their own specific boxes on the capital gains pages.
If you don’t meet the criteria to need to file a return, then capital losses can be claimed by writing a letter to HMRC’s Capital Gains Tax Queries address. There’s no prescribed format for the letter, but as a minimum it should quantify the losses and the tax year(s) in which they arose, along with a calculation to support these figures. If you have a Unique Taxpayer Reference (UTR) then include this as a reference, but if you don’t, we instead recommend including your National Insurance number as an identifier.
The deadline for claiming a capital loss is four years from the end of the tax year of the loss eg 5 April 2028 for a 2023-24 loss. We recommend keeping your own records of your claimed capital losses, as it could be many years before these are set against chargeable gains.
How can our crypto team help?
Our specialist crypto team can assist with planning and compliance requirements around crypto capital losses, along with a wide range of other crypto-related services. Please speak to your usual Saffery contact or get in touch with Robert Mace.