Over $3.8 billion in cryptocurrencies was stolen last year, causing transaction halts on exchanges like FTX, Voyager, and Celsius due to liquidity difficulties. You are not alone if you have been a victim of scams, hacking, asset freezes, or lost crypto through other methods. While your options for recovering your losses may be limited, there may be some optimism from a tax standpoint, since HMRC may allow you to claim a capital loss if you meet certain requirements. Learn more in our detailed HMRC lost crypto guide.

Crypto Tax Basics in the UK

Understanding the basics is the first step in navigating the complexities of crypto taxation. In the UK, HMRC categorizes cryptocurrencies as taxable assets. This means that every trade or sale of crypto might incur a tax liability. The type of tax is determined by the nature of the transaction.

Types of Tax

• Capital Gains Tax (CGT): Applies when you profit from selling a crypto asset that has increased in value.

• Income Tax: Applied when receiving cryptocurrencies as payment for services or from mining operations.

Learn more about UK crypto taxation in our Ultimate UK Crypto Tax Guide. 

Yearly Tax-Free Allowances

UK taxpayers benefit from yearly tax-free allowances for both Capital Gains Tax and Income Tax. Understanding these allowances is crucial for effective tax planning. 

Trading Activity vs. Investor Status

It's important to note that HMRC might categorize your crypto transactions as trading activity, subjecting them to income tax. 

For the purpose of this guide, we assume you are an investor in crypto assets and not a trader.

Capital Gains and Losses

Capital gains and losses are inherent in any crypto investment. A capital gain arises when you sell a cryptocurrency for more than its purchase price, while a capital loss occurs when you sell for less than the acquisition cost.

Formula for Calculation: Capital Gain (or Loss) = Selling Price − Cost Basis

Because cryptocurrencies are volatile, prices can fluctuate rapidly, resulting in significant gains or losses in a short period of time. It's vital to maintain detailed records for accurate tax submissions and to safeguard against potential audits. Explore more about calculating your cost basis in our guide Crypto Cost Basis Methods.

Realized vs. Unrealized Losses

Understanding the difference between realized and unrealized losses is crucial for accurate tax reporting.

• Realized Loss: Occurs when you sell your cryptocurrencies at a price lower than the initial purchase, officially realizing the loss.

• Unrealized Loss: Exists when the market value of your cryptocurrency drops below the purchase price, but you haven't sold it.

Types of Losses and How to Claim

1. Claiming Realized Losses on Trading Activity

If you've sold cryptocurrency for less than its purchase price, this constitutes a realized loss that can be claimed on your tax return. This strategic move allows you to offset other capital gains, potentially reducing your overall tax liability for the year. To maximize the benefit, meticulous record-keeping of all transactions is essential for accurate cost basis calculations.

2. Lost or Stolen Crypto

HMRC does not officially recognize lost or stolen cryptocurrencies as capital losses since you remain the rightful owner despite the loss. However, there's a provision for a negligible value claim if you can prove a permanent loss of access. In case of stolen crypto, if crypto has been bought off an exchange but the investor has not received it, a negligible value chain can be claimed since it will be considered as a scam. This avenue may offer a route for claiming losses in situations where recovery is unlikely.

3. Frozen Funds

Instances where major cryptocurrency service providers, like FTX, leave investors with frozen funds pose a unique challenge. Unfortunately, immediate claims are typically not allowed by HMRC. Investors are advised to patiently await the conclusion of bankruptcy proceedings. If no funds are returned after such processes, a negligible value claim might become permissible, allowing offsetting against future gains.

4. Rug Pulls

Rug pulls, where developers abandon a project, create a distinctive scenario for capital losses. After such events, investors may still possess their tokens, and the loss is not automatically recognized—even if the tokens' value and use have vanished. 

To realize a loss claimable on your crypto tax return, investors need to dispose of these tokens. Methods include selling on: 

• Exchanges 
• Swapping tokens
• Gifting tokens
• Burning them

In cases where an entire blockchain is halted following a rug pull, a negligible value claim might be the most appropriate recourse.

5. Worthless NFTs

The popularity of Non-Fungible Tokens (NFTs) has surged, but their value can fluctuate, and some may become worthless over time. Owning a worthless NFT isn't sufficient to claim a capital loss for tax purposes. 

The NFT must be actively disposed of through selling on the:

• Marketplace
• Gifting
• Burning the NFT - Some NFT platforms allow you to 'burn' or remove the NFT permanently. By burning, you are effectively confirming the NFT's worthlessness and disposing of it, which can aid in the realization of the capital loss.

This strategic move allows you to realize the capital loss and potentially offset it against gains.

By understanding the type of loss and the corresponding claim procedures, crypto investors can navigate the complexities of tax regulations and potentially mitigate the impact of these losses on their overall tax liability. It's crucial to stay informed, keep detailed records, and, if needed, seek professional advice to ensure compliance with HMRC guidelines.

What Costs Can Be Claimed?

Specific expenses can be deducted when calculating a cryptocurrency loss:

• Initial Investment: The amount of fiat currency initially used to purchase the cryptocurrency.

• Pre-Blockchain Transaction Fees: Costs incurred before the transaction gets recorded on a blockchain.

• Base Value of Exchanged Cryptocurrency: Deductible if you swapped one cryptocurrency for another.

• Advertising Expenses: Expenses incurred while looking for a buyer or seller

• Valuation and Calculation Costs: Expenses associated with valuing or partitioning your holdings.

• Professional Contracting Fees:  The costs of preparing contracts for the purchase or sale of cryptocurrency.

However, expenses related to crypto mining, such as equipment costs, cannot be deducted in this context.

How to Claim Crypto Losses on Your Tax Return in the UK

HMRC provides clear directives for managing capital losses. Notably, there is no ceiling to the number of capital losses that can be offset against gains. This flexibility allows significant losses to decrease gains down to the CGT personal allowance level. Excess losses can be carried over to subsequent financial years, offsetting future gains.

To benefit from this carry-forward mechanism, losses must be duly registered. Registration can be achieved through the completion of a Self Assessment tax return or by providing HMRC with a formal written notification of the losses.

Time Frame: It is critical to act within a specific time frame. You have four years from the date of the loss to register with HMRC. Failure to do so will result in the loss of the ability to carry them forward.

Same-Day and 30-Day CGT Rules: Investors should be vigilant about the intricacies surrounding the same-day and 30-day CGT rules. These rules prevent a tactic known as ‘bed and breakfasting,’ where investors deliberately sell assets at a loss and quickly buy them back to obtain a tax advantage.

Common Mistakes to Avoid

When offsetting crypto losses in the UK, some common pitfalls should be avoided:

• Incomplete Record-keeping: HMRC expects detailed records of all transactions. Failure to keep detailed records can result in incorrect calculations and potential disputes.

• Misunderstanding Disposal Events: In crypto, disposals aren't just sales. Exchanging one crypto for another, gifting, or using crypto for purchases can all be considered disposals.

• Ignoring the 'Bed and Breakfasting' Rule: Selling a crypto asset and re-buying it shortly afterward (within 30 days) to realize a loss and reduce tax liability is a tactic HMRC is aware of.

• Not Reporting Losses in Time: You have a four-year window to report losses to HMRC. Missing this timeframe means losing the ability to carry forward those losses.

• Misapplying Negligible Value Claims: Claiming that a cryptocurrency is worthless or of negligible value necessitates a thorough understanding of the rules and, in many cases, evidence that there is no hope of recovery.

• Miscalculating the Cost Basis: Using wrong methods or making mistakes when calculating the cost basis of crypto assets can lead to incorrect loss figures.

• Overlooking Fees and Allowable Costs: Transaction fees, costs associated with valuations, and other relevant expenses can be deducted. Failing to include these can lead to an overestimation of gain or an underestimation of loss.

• Assuming All Crypto Activities are the Same: Different activities, such as mining and staking, may have different tax consequences. Treating all of these as simple disposals can lead to errors.

Easily Claim Your Tax Relief with Kryptos!

Claiming crypto losses on your tax return with Kryptos’s crypto tax calculator couldn't be easier!

If there's a crypto asset that is lost or stolen, in the Kryptos platform, you can simply tag it as "LOST."  This will automatically be noted in your tax return, and you can then consult with an accountant to learn how to offset it.

UK’s Top Cryptocurrency Tax Software - Kryptos offers a user-friendly solution for claiming tax relief on crypto losses. Their comprehensive crypto tax reports in PDF format include information about all about your crypto transactions. These reports can be used as proof of origin with banks or tax advisors.

Steps with Kryptos:

1. Import Your Transactions: Easily integrates with your favorite Platforms and Services. Kryptos integrates with over 3000+ DeFi protocols for comprehensive tracking. Automatically import your transactions via API integration, wallet address synchronization, or by manually uploading an Excel file.

2. Validate & Optimize: Kryptos offers smart insights and suggestions to optimize your tax report, fix issues, add missing values, and validate your transactions.

3. Generate Your Tax Report: Generate your compliant tax report with the click of a button. The tax engine calculates your report based on the UK tax framework.

FAQs

1. Is Lost Crypto a Capital Loss in the UK?

HMRC doesn't recognize lost or stolen cryptocurrencies as capital losses since the owner retains ownership. However, a negligible value claim may be applicable if you can prove permanent loss of access.

2. How do I declare crypto on my tax return in the UK?

Declare crypto on your UK tax return by registering losses through a Self Assessment tax return or providing HMRC with a formal written notification. Act within a four-year window from the loss occurrence.

3. How does HMRC find out about crypto?

HMRC has been enhancing efforts to trace crypto transactions. Given the anonymous nature of some transactions, it's crucial to report all activities, as failing to do so can result in significant penalties.

4. Can I claim investment losses on my tax return in the UK?

Yes, you can claim investment losses on your tax return in the UK. Capital losses can be offset against gains, potentially reducing your overall tax liability. Excess losses can be carried over to offset future gains.

5. What costs can be claimed for crypto losses?

Deductible costs for crypto losses include the initial investment, pre-blockchain transaction fees, base value of exchanged cryptocurrency, advertising expenses, valuation and calculation costs, and professional contracting fees. However, crypto mining-related expenses are not deductible.

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All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!