Utilising Crypto Losses to Reduce Your Tax Liability

When crypto dropped significantly in 2022, many critics hailed it as the start of the end for digital currencies. This was a short-sighted view, as crypto is now a significant level away from its lows of 2022 and is once again attracting the attention of the masses.

Many wallets may now have started to bounce back from the lows of 2022 and are again beginning to realise gains. With this a hefty tax liability could follow for those in the UK. The good news is that previous losses can be offset against future gains and could significantly reduce tax bills now and in the future, if the correct protocol is followed.

Isn’t crypto private – when is tax paid due on crypto?

HMRC has a data sharing program with all exchanges in the UK. With access to data from transactions going back to 2014, it is continually building its knowledge in this sector and receives KYC information when accounts are created for any UK wallet or exchange.

HMRC’s data sharing agreements with other countries means it may also be able to access data from overseas jurisdictions as well. The result of this is that, in the UK, HMRC can check if they believe you should have declared tax on any crypto held. Note that if you are resident in the UK, you are liable for tax on your worldwide income, not just earnings from UK based wallets and exchanges.
To recap, tax may be due when crypto is traded, exchanged or disposed of, not just when it is converted into fiat. Crypto could also be liable for capital gains tax when crypto is given away to somebody other than a spouse. With the capital gains tax annual allowance now reduced to £6,000 per tax year, and scheduled to reduce to £3,000 in 2024, this means more people are now liable for tax on their crypto in the UK and will now be required to submit a tax return.

Utilising crypto losses to reduce your tax liability

To utilise a tax loss, this first needs to be realised. In simple terms, the fact that a wallet has lost value is not sufficient. An asset will need to be disposed of, for example by exchanging it for another token, into fiat or transferring it to an unconnected party. Similar to the way shares are dealt with, there are strict rules if crypto is bought or sold within a 30-day period. Emily Bingham, Tax Manager at Alexander & Co, who specialise in crypto tax, explains “losses can be offset against any gains made in the same tax year. Where total taxable gains are above the tax-free allowance after factoring in losses made in this period, unused losses from previous tax years can also be deducted (subject to certain conditions). If this reduces your gain within the tax-free allowance, any remaining losses can be carried forward to a future tax year.“
Losses are required to be reported to HMRC, to reduce total taxable gains. Given the recent volatility in the market, when utilised correctly this has the potential to reduce more than one year’s tax bill. You have four years to claim these, either by submitting them on your tax return, or formally notifying HMRC in writing.”

When calculating losses or gains for capital gains tax purposes, all losses or gains realised through the disposal of chargeable assets should be calculated together within a relevant tax year. This means that alongside crypto, stocks and shares, property (that is not exempt) and other taxable assets should be considered when making a capital gains tax calculation. As many crypto investors may also hold shares or property as investments, any losses here can be utilised in the same way to reduce the tax on crypto gains.

Summary – utilising your losses and minimising tax

HMRC is becoming much more sophisticated in the way it tracks crypto activity. Anyone unsure of their tax liability should consider advice to better understand this. Many with crypto assets are already receiving letters from HMRC, where it may have evidence of crypto investing. This does not necessarily mean that tax is due, especially if losses can be realised and offset. Any requests from HMRC should not be ignored, as this could lead to a formal tax investigation. Understanding the ever-changing tax implications of crypto, including how to utilise your losses could help increase profitability in crypto investment. When used correctly, any losses incurred can be utilised. By working with a tax professional, you can make minimise your tax liability to help maximise your crypto gains.

About the Author
Alexander & Co is one of the UK’s leading crypto tax advisors, whose clients include investors, traders, crypto businesses including NFT creators and those firms reliant on the sector. Alexander & Co’s website offers useful information on cryptocurrency tax that will help you navigate this complex area of tax and can assist where required.