A Comprehensive Guide to UK Crypto Tax Loss Harvesting

Investing in cryptocurrency can provide an exceptional opportunity for profit, but in the UK, it’s important to be aware of how your investment will be taxed in order to facilitate responsible financial planning. One way you can improve your tax position is through a process called Crypto Tax Loss Harvesting.

This guide will help to explain the fundamental principles, HMRC rules, and some practical strategies for UK investors to consider when it comes to tax loss harvesting.

Understanding Tax Loss Harvesting

What is Tax Loss Harvesting?

Tax loss harvesting (or tax loss selling) is a legal method of reducing taxable gains. This process involves selling an asset - such as crypto currencies, shares or property – at a loss so that a loss can offset the gains you have on other investments and reduce your total tax liability.

HMRC Allowable Losses

Before tax loss harvesting can be put into practice, it’s important to understand the HMRC allowable losses:

• Every taxpayer in the UK has a Capital Gains Tax-free allowance of£6,000 (£3,000 from April 2024-25).
• Any gain over this allowance can be offset by any losses.
• If gains are not over the allowance, loss can be carried forward to future years.
• Losses must be reported within four years once the assets have been disposed of.
• Losses cannot be claimed on any assets sold or transferred to other family members, unless a gain is made on disposal bythat family member.

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Understanding Tax Loss Harvesting

Example: Crypto Investments

Let's assume you purchased Ethereum for£500 and Bitcoin for £26,000. Ethereum rises to £2,000 while Bitcoin drops to£24,000.

Without Tax Loss Harvesting you'll have:

You'll have a taxable gain of £1,500 in Ethereum.

With Tax Loss Harvesting you can:

 You could sell Bitcoin at a £2,000 loss, which will offset that £1,500 gain in Ethereum.

Result:

• You will have no tax to take into account for that year and carry £500 worth of losses forward.
• HMRC And Bed And Breakfasting Transactions
• HMRC has certain restrictions in place to stop artificial losses through buying back quickly.
• Same Day Rule: If you sell and buy back the same asset in one day, you’ve used that day’s cost basis for these calculations.
• Bed and Breakfasting Rule: If you sell and buy back your position within 30 days of selling them, HMRC will use the asset’s cost basis for the month of your purchase.
• The purpose of these rules is to stop taxpayers from manipulating tax loss harvesting.

Key Dates for Tax Loss Harvesting

When tax loss harvest is appropriate depends on the timing.

In the UK the financial year runs from April 6 until April 5 the following year.

So when you're doing your tax loss harvesting you should take action prior to April 5 to stay in the same financial year.

Also, you must file your taxes by January31 of that following tax year to avoid a penalization.

Also note that the Capital Gains tax-free allowances are reducing.

2022-23: £12,300

2023-24: £6,000

2024-25: £3,000.

Sure, it is a good idea to try and maximize your gains while the allowance is still larger than £3,000.

Utilizing Kryptos for Tax Loss Harvesting

Tax loss harvesting is straightforward if you are using tax software such as Kryptos:

How to Use Kryptos

• ‍Monitor Total Tax Liability: Be aware of how much you have gained/lost each year.‍
• Connect Wallets and Exchanges: Pull together all the crypto activity into one location.‍
• Create Tax Reports: Generate reports for self-assessment or to provide to accountants.‍
• Upgrade to the Paid Plan: Get the advance report options and recommendations for professional-grade analysis.

Kryptos allows you to track realized gains and unrealized gains, making it easier to comply with HMRC laws.

FAQs

1.What is tax loss harvesting, and how is it beneficial to UK crypto investors?

Tax loss harvesting is when an investor sells an asset at a loss to offset taxable gains that an investor has made. For UK investors, tax loss harvesting reduces overall tax liability and optimizes financial outcomes.

2.How do HMRC allowable losses impact tax loss harvesting?

Each taxpayer has a £6,000 Capital Gains Tax allowance. Any realized losses can offset any gains greater than £6,000;losses not used can be carried forward to the following year and beyond.

3.Can you give an example of this with crypto?

If the investor sold Bitcoin at a loss and had taken gain in Ethereum you've now reduced your taxable gains and presumably have reduced your tax liability.

4.What are the main tax loss harvesting rules HMRC has?

Same-Day Rule: The cost basis on that day.

Bed and Breakfasting Rule: The cost basis for 30 days.

These rules were created to stop artificial losses.

5.How can Kryptos assist me?

Kryptos tracks all gains/losses, connects to wallets and exchanges, and generates reports for HMRC or accountant, making tax loss harvesting easier.

About the author

Payam Masood

Head of Content and Social Media - Kryptos