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Have your cryptoassets dropped significantly in value or are they locked up/lost through the collapse of exchanges or other platforms?
We have written the following thought piece to provide practical guidance, education and support for UK tax resident individuals facing financial ruin where their assets have dropped in value or where they have lost their assets due to exchange collapses.
The issues
Many people still do not understand that the following constitute a taxable disposal (meaning that if the assets are standing at a gain, the following transactions would have triggered a capital gains tax charge (CGT)):
- The exchange of crypto for crypto
- The exchange of crypto for fiat
- The staking or provision of cryptoassets for lending/ collateral.
Consequently, many individuals are deemed to have realised gains in 2021/22 with a tax charge to pay despite in some cases not having ‘sold’ the asset and not having withdrawn the assets back to fiat (as they have been reinvested back into crypto).
The issue they face is that those assets are:
- now worth a fraction of the 2021/22 value; and/or
- trapped in platforms that have halted withdrawals or filed for insolvency,
leaving the holder without funds and/or assets to cover the 2021/22 tax liability.
Some of the points below provide steps of things that you can do now to help better protect yourself in relation to your UK taxes following the recent news of FTX and the fallout from that.
There are a number of detailed tax consequences of investing in cryptoassets but these have not been covered in any detail but we will do follow on articles and FAQs breaking down the various tax consequences of investing in crypto.
What steps can I take now?
- Record keeping
We cannot overemphasise the importance of record keeping.
After the collapse of a platform it has historically not always been possible to extract your trading data. In order to claim losses you will need to provide records for those losses.
With depressed cryptoasset values in the current (2022/23) tax year, many individuals have suffered significant losses and claiming these will be valuable.
We note that at the time of writing, you can still access records from Celsius and FTX and we suggest doing this immediately.
It is good practice regardless to always keep a permanent record of your own history.
In addition, you can use crypto software together with an API key to download the data directly into the software. A csv copy of your information should still be obtained in case this information is not supported in the future for any reason.
If you already have crypto software then you can refresh the API data and it should pull through the latest transaction history to date, but this may not necessarily continue.
- Understand your tax position
As stated above, many users are unaware of the fact that they have gains in the 2021/22 tax year and losses in the current tax year. For example:
- How the crypto to crypto trades are taxed
- Not factoring in disposals on going into DeFi protocols
- Not considering that when you purchase an NFT you also have a disposal of that cryptocurrency for example Eth disposal to acquire the NFT.
There is crypto software that can help you calculate your tax position in relation to your crypto transactions. Favourites for crypto tax calculators and software amongst our UK resident clients are Recap (https://recap.io/) and Koinly (https://koinly.io/).
This will require going back to the beginning of your crypto journey, but will give you a better idea of where you stand with your taxes, any available reliefs and your filing obligations.
The tax report will only be as good as the data that goes in; as the saying goes, “rubbish in, rubbish out”. However, if you have only used major exchanges for transactions then the csv files you input or API data used should be relatively straightforward and ensure that you have captured everything.
If you have complex transactions, there are increasing numbers of crypto tax specialists (such as us) who can help. Whilst a big cost, it can save you in the long run in penalties and interest if you have not correctly reported your income and gains.
- Losses
Claiming your losses is critical to ensuring you do not pay more tax than you need to.
Example:
- You have made capital gains in 2021/22 of £25,000 and losses of £20,000 in the same year.
- You do not notify HMRC to report this on a self assessment tax return as you do not otherwise meet the criteria.
- Whilst there is no capital gains tax to pay you do need to actually claim those losses.
- This can be done by paper or in a subsequent return and you have up to 4 years to claim your losses (i.e. losses in 2018/19 tax year can be claimed up to 5 April 2023 but not thereafter.)
There may be losses from 2018/19, given the January 2018 crash impact, that can be claimed and used against gains in the subsequent years including 2021/22.
Losses cannot be carried back, but can be used against current tax year gains and, once claimed, can be carried forward indefinitely against future gains.
We have included an illustrative template to write to HMRC to claim your capital losses here.
- Negligible Value Relief claim
Worthless assets
If you have not realised a loss from trading in and out of crypto, but you have an asset where the value has “gone down to next to nothing” (HMRC’s interpretation of negligible), then there is the opportunity to claim a relief known as “negligible value relief”.
An example of this would be with the Luna Classic (USTC) collapse in May 2022; the algorithmic stable coin originally pegged to USD that collapsed to a price around $0.02.
Negligible value relief treats the asset as having been disposed of and then reacquired using the new low base cost. The resulting capital loss can be claimed and used against gains in the same tax year or carried forward.
It would be a good exercise to review any previous investments and see if the negligible value claim is applicable as there have been a number of cryptocurrencies and assets where they fell to “next to nothing’.
You can make backdated claims providing you can evidence that you owned the asset at the time it fell to negligible value. The backdated claim has a time limit, so pre 5 April 2023 you can go back to 6 April 2020 onwards and make a claim. Again, any capital losses still need to be claimed within the usual 4 year window.
- Loss of assets
If you use exchanges for carrying out your transactions then you should make sure you have copies of the terms and conditions (T&Cs) including any updated terms.
Negligible value relief is available if there has been an entire loss of the assets. This isn’t as straightforward as people think due to the wording of the legislation.
If the exchange has filed as insolvent / bankrupt, then it may be possible to make a negligible value claim if you lose your assets. This involves waiting to see the outcome of the bankruptcy as you do not know what you will be able to recover. HMRC would not necessarily allow a claim unless you can demonstrate that there is no reasonable expectation of getting any of the assets back. Realistically this is a bigger issue in this current tax year (2022/23) and so there is some time to wait and see (i.e. before the 2023/23 return is due for filing on 31 January 2024).
If you have had assets stolen by a hack or scam then you can claim that loss. Whilst theft of an asset is not a disposal, you can claim negligible value relief if there is no likelihood that the assets will be recovered.
If you have assets in a custodian account with an exchange where you have retained the ownership of those assets and the exchange has been either fraudulently taken by hackers or in cases where assets have been misappropriated then again a negligible value claim is possible, but can only be claimed in cases where there is no likelihood that the assets will be recovered.
We will have to see how the latest FTX position plays out to properly determine the tax consequences, as it stands they have filed for bankruptcy, SBF arrested for fraud (suggesting misappropriate) and the US courts examining who is the owner of the assets, and there could be different outcomes depending on what services were used.
- Debt management
If you know you have a tax liability for 2021/22 and are concerned that you do not have the funds to pay the taxes then there are options to contact HMRC and ask for a “time to pay arrangement”.
HMRC will ask for your income and expenses to determine your affordability and they are geared to help taxpayers wherever they can.
If you think you may have to request this, it’s better to contact HMRC closer to 31 January 2023 (tax due for 2021/22) rather than after the date. It would be faster to call HMRC, as opposed to writing and you can call their debt management line on 0300 200 3822.
It is not HMRC practice to write off tax debt, but they do have powers under exceptional circumstances where they can consider this or where they may release the taxpayer from their liability. This is not their usual practice and has only previously been agreed in rare cases based on each individual’s facts and circumstances, but it may be worth considering.
If you cannot afford to pay your tax debts then there are organisations that can help you in relation to your HMRC debts or tax administration if you are classed as a lower earner and we have included their details below.
Stepchange – https://www.stepchange.org/
Taxaid https://taxaid.org.uk/
Some questions have been asked about whether HMRC can take your house and the answer is no. Whilst they can put a charge over the property depending on the circumstances they cannot make you homeless. However bad the HMRC tax bill is, there is help out there and it is always better to go to HMRC first.
- Tax filing and payment dates
If you have a tax liability for 2021/22, you should have notified HMRC by 5 October 2022 that you need a self assessment tax return. Late notification can give rise to higher penalties in cases where an HMRC investigation is raised or if there has been deliberate behaviour in not notifying HMRC.
If you are already in the Self Assessment regime then you will know that the deadline for filing tax returns for 2021/22 online is 31 January 2023. Any tax is also due on 31 January 2023.
Late filing and late payment of tax means additional penalties and interest.
If you do not have the information fully completed by 31 January, you can file a provisional tax return and provide the final details shortly after.
Any losses for 2018/19 must be claimed by 5 April 2023 and can be done by letter and we are following up with a template for this.
- Help us lobby for and create change
Have we covered the tax issues concerning you? If not, please tell us more about your situation with the form below. It is completely anonymous, unless you wish to share your contact details.
We will use this information to tailor more pragmatic articles and to lobby for change of tax law through the trade bodies CryptoUK and the UK Crypto Business Council.
If you would like to contact us directly, you may do so here crypto@uk.andersen.com. However, please note that due to the wide scale impact of current market conditions, we may not have capacity to respond to all. Instead, we will group together facts and respond generically in this format. If you would like to subscribe to our regular crypto tax newsletter and mailouts, please click here.