Crypto losses – Coping with the post-boom bust for UK investors

During the Covid-19 pandemic, crypto investments were at their peak. With an increase in the number of 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 because of fear of missing out.

The basis of most investments is to buy assets in the hope that they will become more valuable over time. Crypto investing is no different, but price predictions have failed dramatically.

In what has been described as the “crypto winter”, the crypto market this year has been marked by falling prices and an increase in fraud – leaving many people with unforeseen losses, unable to access their investments or in debt to crypto lenders.

There is still hope, as loss claims could be a potential way for UK crypto investors to deal with the post-boom bust.

Taxation of crypto assets in the UK

While cryptoassets are unregulated financial products in the UK, HM Revenue & Customs’ Cryptoassets Manual makes it clear that the purchase and sale 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, the profit (minus any allowable costs) is subject to tax at 20%.

Where trading volume is significant, the activity will be taxed as trading. Trading profits tend to be taxed at up to 45% and National Insurance may also have to be paid; although it should be noted that very few individuals will reach the necessary level of trade to be taxed in this way.

Minimizes crypto losses

Where an asset has declined 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.

Take advantage of losses

When a loss arises from the disposal, for example sale, of an asset:

• Any losses must first be used against gains that occur in the same tax year.
• Losses that have not been utilized can be carried forward for use against future gains.
• Losses incurred during the year must be used before any unused carry forward losses are used.

It is worth bearing in mind 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 realised.

Insignificant value claims

For those who have not sold their assets but are concerned about price falls, losses can “crystallize” if assets not disposed of become worthless or of negligible value. This type of claim effectively treats the asset as having been disposed of and then acquired at the lowest value – generating a loss as a result of the deemed disposal. The claim will be made on a crypto pool (ie on the entire holding of a particular currency/asset) rather than on individual units/tokens.

While it is up to the taxpayer to state the value of the asset at the time of the claim, HMRC may seek to challenge the valuation.

When these losses are crystallized when the claim is made, they can be used against other gains.

For those who may have gains in previous tax years where the losses could be utilised, insignificant value claims can be backdated, as long as:

• The taxpayer owned the asset at the previously stated 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 have invested in crypto shares, provided they meet the eligibility criteria, the losses can be used against income. The criteria are:

• The assets must be qualifying shares, meaning that either Enterprise Investment Scheme relief can be attributed to them or they are shares in a qualifying trading company subscribed by the taxpayer.
• The company must have been a trading company throughout the six years up to the disposal date, or throughout its existence if this is less than six years. If the company ceased trading before the disposal of the shares, the relief is still available if:
  • the company ceased trading no more than three years before the disposal;
  • the company has not started a non-qualifying activity (such as investment); and
  • on the date it ceased trading, it met the “six-year 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 the holding) is lost and a person does not have access to their investment, this does not count as a disposal. However, it may still be possible to make an insignificant value claim on the basis that the purchase is in reality worthless if no one gets access to it. It is likely that supporting evidence will be required.

Some have been victims of fraud or theft. Those who handed over large sums of money and never received ownership of the assets will not be able to rely on the tax deduction provisions. However, where the asset was paid for and received, a negligible value claim may be available if the investment was worthless.

Neglect

Any kind of investment is risky. But when crypto arrived, many hailed it as a safe card. Investors who were referred to a crypto investment by an accountant or professional adviser without being warned of the risks of doing so may also 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 on to their crypto assets in the hope that the market will improve, or cutting their losses now.

The crypto market can 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 best to manage 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.

Author information

Morag Ofili is a senior assistant at Harbottle & Lewis.

The author can be contacted at: [email protected]