Claiming tax relief on your cryptocurrency losses
Several years ago we published a post which discussed how profits from cryptocurrency might be taxed. However you may have suffered losses when the market slumped. This article therefore discusses the options for claiming tax relief on your cryptocurrency losses.
HM Revenue's updated guidance does now provide some insight into claiming tax relief on your cryptocurrency losses - though only for individuals. HM Revenue have yet to publish their guidance for businesses and companies. Despite the chancellor appointing a cryptoassets taskforce, no specific taxes legislation for cryptocurrency transactions has been introduced.
If you are an individual investing in cryptocurrency the capital gains tax treatment is most likely to apply. Therefore when claiming tax relief on your cryptocurrency losses these will be subject to capital gains tax rules.
What costs can be claimed when computing a loss?
Certain expenditure is allowable as a deduction when calculating your loss, these include:
However, you cannot claim for the costs of mining activities (e.g. equipment) in these circumstances.
Claiming for cryptocurrency that's lost it's value
You can crystallise capital losses for cryptocurrency you still own if it became worthless or of ‘negligible value’. Put simply a negligible value claim treats the cryptocurrency as being disposed of and reacquired at an amount specified on the claim
As cryptocurrency is pooled like shares, the negligible value claim needs to be made in respect of the whole pool, not the individual cryptocurrency units/tokens .
Making a negligible value claim
In order to make a negligible value claim, the following must apply:
Backdating a claim
You can backdate a negligible value claim as long as these conditions are satisfied:
For example you could make a claim on the 5 April 2020 and this could be carried back as far as 6 April 2017.
This can be useful if you've not made any capital gains in the current tax year though have done so in the previous two. Since your cryptocurrency must have already become of negligible value at the time to which the claim is being backdated, this will be useful only if the possibility of a negligible value claim was overlooked previously.
Cryptocurrency lost or stolen
You could lose your private key meaning you are unable to access your cryptocurrency. The private key still exists, though it is no longer known to you. Similarly the cryptocurrency still exists in the distributed ledger. This means that losing your key does not count as a disposal for Capital Gains Tax purposes so no loss can be claimed.
However if you can show there's no prospect of recovering the private key or accessing the cryptocurrency held in the corresponding wallet, a negligible value claim could be made (see above).
If you invest in cryptocurrency, there’s always the risk of becoming a victim of theft or fraud. HM Revenue does not consider theft to be a disposal, as the individual still owns the assets. They also have the right to recover them. This means victims of theft cannot claim a loss for Capital Gains Tax.
Additionally if you don't receive the cryptocurrency you pay for, you may not be able to claim a capital loss.
However if you pay for and receive cryptocurrency, you might be able to make a negligible value claim if it subsequently turns out to be worthless.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].