During the Covid-19 pandemic, crypto investment was on a high. With a surge in overnight millionaires, many were evangelical about the ability to get rich quick. It was reported by the Financial Conduct Authority that by June 2021, 2.3 million Britons had invested in crypto—14% said they had borrowed to invest and 18% said they did so due to fear of missing out.
The basis of most investing is buying assets in the hope that they will become more valuable over time. Crypto investment is no different, but the price predictions have failed dramatically.
In what has been described as the “crypto winter,” this year the crypto market has been marked by plunging prices and a rise in scams—leaving many people with unforeseen losses, unable to access their investments or in debt to crypto lenders.
There is still hope, however, as loss claims could be a potential way for UK crypto investors to manage the bust after the boom.
Taxation of Cryptoassets in the UK
While crypto assets are unregulated financial products in the UK, HM Revenue & Customs’ Cryptoassets Manual makes clear that the buying and selling of cryptoassets by an individual is treated in the same way as general investment activity and should attract capital gains tax treatment. Under the capital gains tax regime, when assets are sold at a profit, those profits (less any allowable costs) are subject to tax at 20%.
Where trading volume is significant, the activity will be taxed as a trade. Trading profits tend to be taxed at up to 45% and National Insurance may also need to be paid; though it should be noted that very few individuals will reach the requisite level of trade to be taxed in this manner.
Minimizing Crypto Losses
Where an asset has decreased in value, taxpayers may be able to take advantage of claims such as using any losses on disposal against future capital gains or making a negligible value claim.
Where a loss arises on the disposal, for example the sale, of an asset:
- Any losses first must be used against any gains that arose in the same tax year.
- Losses that have not been utilized can be carried forward to be used against future gains.
- Losses arising in the year must be used before utilizing any unused carried forward losses.
It is worth remembering that capital losses are not transferable and therefore cannot, for example, be transferred from one spouse or civil partner to the other.
Losses must be claimed within four years of the end of the tax year in which the loss was realized.
Negligible Value Claims
For those who have not sold their assets but are concerned by plummeting prices, losses can be “crystallized” if assets that are not disposed of become worthless, or of negligible value. This type of claim effectively treats the asset as having been disposed of and then reacquired at the lower value—generating a loss as a result of the deemed disposal. The claim would be made on a crypto pool (i.e. on the entire holding of a particular currency/asset) rather than on individual units/tokens.
While it is for the taxpayer to state the value of the asset at the time of the claim, HMRC may seek to challenge the valuation.
Once these losses are crystallized by the making of the claim, they can be used against other gains.
For those who may have gains in earlier tax years where the losses could be utilized, negligible value claims can be backdated, as long as:
- The taxpayer owned the asset at the earlier specified time.
- The asset had become of negligible value at that time.
- The earlier time is not more than two years before the beginning of the tax year in which the claim is made.
For those who invested in crypto shares, subject to satisfying the eligibility criteria, the losses can be used against income. The criteria are:
- The assets must be qualifying shares, i.e. either Enterprise Investment Scheme relief is attributable to them or they are shares in a qualifying trading company that have been subscribed for by the taxpayer.
- The company must have been a trading company throughout the six years to the date of disposal, or for its entire existence if that is less than six years. If the company stopped trading before the disposal of the shares, the relief is still available if:
- the company stopped trading no more than three years before the disposal;
- the company has not started a non-qualifying activity (such as investment); and
- at the date it stopped trading, it satisfied the “six-years test” explained above.
Loss or Fraud
When a private key (a secure code that enables the holder to make cryptocurrency transactions and prove ownership of their holdings) goes missing, and an individual is unable to access their investment, this does not count as a disposal. However, it may still be possible to make a negligible value claim on the basis that the purchase is effectively worthless if no one can access it. It is likely that supporting evidence would be required.
Some have found themselves the victim of fraud or theft. Those who handed over large sums of money and never obtained ownership of the assets will not be able to rely on the capital gains tax loss relief provisions. However, where the asset was paid for and received, a negligible value claim may be available if the investment was worthless.
Any type of investment is risky. But when crypto came along, many hailed it as being a safe bet. Investors who were directed to a crypto investment by an accountant or professional adviser without being warned of the risks of doing so may also want to consider a professional negligence claim. Where it can be successfully argued that had proper advice been given, the investment would not have been made, there may be an opportunity to recover the costs of making the investment from the adviser (usually through their professional insurance).
Time to Let Go?
With struggling global financial markets, falling crypto asset valuations, and the collapse of several crypto firms, many investors are faced with the difficult decision of either holding onto their crypto assets in the hopes that the market will improve, or cutting their losses now.
The crypto market may return to its former glory and, if there is an opportunity to make gains in the future (in crypto or elsewhere), those who do not seek advice on how to best deal with their losses now so that they are available in the future may live to regret it.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Morag Ofili is a Senior Associate at Harbottle & Lewis.
The author may be contacted at: email@example.com