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It’s been a rough year for crypto investors. From platforms like Celsius and FTX going under, to the NFT hype train running out of steam – the crypto winter has arrived. But those losses might just offer a silver lining when it comes to your taxes. (Words you never thought you’d hear, right?)
We’ve teamed up with our crypto tax partner Koinly to give you the inside scoop.
Whenever you dispose of crypto by selling, swapping, spending or gifting it, your gains may be subject to Capital Gains Tax (CGT). But – another silver lining – there’s no CGT to pay if you’re gifting crypto to your spouse or civil partner.
HMRC also doesn’t tax all your capital gains – you actually get a £6,000 tax-free CGT allowance for the 2023/2024 tax year.
But, as many investors know – especially crypto investors – not all investments end in a gain. Sadly, some result in a loss. This is what’s known as a capital loss. And while nobody likes losses, you can actually use them to cut your tax bill. How? By offsetting losses against gains. Don’t worry, we’ll explain exactly what we mean below.
The CGT allowance
In the 2022 Autumn Budget, the Chancellor announced that the CGT allowance was being cut in the 2023/24 and 2024/2025 tax years. From April 2023, the tax-free allowance went from £12,300 to £6,000, and from April 2024, it will be £3,000.
There are some important things you need to know about capital losses.
First up, you need to “realise” losses in order to offset them. That means you need to dispose of your crypto by selling, swapping, spending or gifting it (not to your spouse/civil partner – that’s tax free). Before this point, you have an “unrealised loss”.
Basically, you can’t count your crypto as a loss if you still own it. Once it’s disposed of, it’s officially a loss – and from this point, you can use it to your tax-advantage.
There’s no limit to the amount of losses you can offset against your gains. You can use your losses to bring yourself back under your CGT tax-free allowance, or closer to it than you were before, so you have less tax to pay
If you’re thinking to yourself, “what gains?” – then there’s good news! If you have no gains to offset your losses against, you can carry losses forward to offset against gains in the future. But there’s a catch. You need to register your losses with HMRC within four years. Once you do that, you can carry them forward indefinitely until they’re used up. You can register losses with HMRC via your Self Assessment tax return
Finally, there are some important rules that prevent investors from creating artificial (or paper) losses, known as the same-day and 30-day CGT rules. These rules prevent investors from deliberately selling assets at a loss and then buying them back in a short time frame to gain a tax advantage.
Tax-loss harvesting is when you use the loss from one asset to bring down the amount of CGT you need to pay on another. In other words, it’s selling your assets for a loss to offset the amount of CGT due on the sale of other assets at a profit.
Most investors opt to use crypto portfolio trackers, like our partner Koinly, to do this. Koinly lets you see your overall portfolio performance, including both your realised and unrealised gains and losses, plus your individual holdings performance. This includes your ROI, so you can easily figure out which losses to harvest to optimise your tax position.
There are some scenarios where realising your loss is easier said than done, including:
OK, this may sound like a bunch of random words we put together. But that’s where Koinly comes in. Read more on what this means, and find out what to do if you’re in one of these mysterious situations!
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