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. 

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:

  • The amount in fiat originally paid for the cryptocurrency
  • Transaction fees paid before the transaction is added to a blockchain
  • The base 'cost' of any cryptocurrency exchanged for another cryptocurrency 
  • Any advertising spend for a purchaser or a vendor 
  • The costs of making a valuation or apportionment to be able to calculate gains or losses. This might include the cost of subscription for software designed to compute gains or losses
  • Professional fees for preparing a contract for the acquisition or disposal of the cryptocurrency 

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: 

  • You must own the cryptocurrency at the time the claim is made
  • You need to state the value of the cryptocurrency at the time of the claim. There is no statutory definition however HM Revenue states: ‘An asset is of negligible value if it is worth next to nothing’ 

Backdating a claim

You can backdate a negligible value claim as long as these conditions are satisfied:

  • You owned the cryptocurrency at the earlier specified time
  • The cryptocurrency had become of negligible value at that time. The earlier time being not more than two years before the beginning of the tax year in which the claim is made

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].

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