After a week of cryptocurrency chaos and collapses, now seems an appropriate moment to address the issue of losses in relation to capital gains tax (CGT). A couple of weeks ago I looked at how gains made on cryptocurrencies are taxed (IC 14 May), and how important it is to put money aside to pay HMRC. It’s also important to make use of losses whenever possible to reduce your tax bill. But while your realised gains above the annual exempt allowance are always counted and taxed, the rules mean that some losses can go to waste.
So how can you extract maximum value from losses? First, as with gains, losses only exist from a tax point of view when they have been realised, for example through a sale or a transfer – but note that you cannot claim a loss for tax purposes when the transfer is to someone in your family or a connected person. You may not wish to sell an asset sitting at a loss if you believe its price will recover in the future, but many people who have stop losses on their crypto trading programs will have automatically crystallised losses during the recent turbulence.
Losses can be used in two ways. The first way is by offsetting them against any gains realised in the same tax year which will reduce your potential tax bill. In fact you have no choice about this – when you report a loss in the same tax year as a gain, they must be offset against each other. It sounds great but because losses in the same year are applied before the annual exempt allowance (AEA) of £12,300, this means the AEA can be utterly wasted. If your same-tax-year gains are greater than your losses then you can use the AEA to mop up more gains.
The second way you can use losses is by carrying forward unused ones, say because you had no realised gains in the same tax year or because your losses were greater than your gains. Carried forward losses are valuable because they can be applied after the AEA is deducted from your gains. Leftover losses can be carried forward again and again, although if your gains are lower than the AEA then you do not get the opportunity to use the loss. “You cannot go backwards with losses to use them on gains that arose in the previous tax year,” says Chris Etherington, partner at RSM.
You must register a loss with HMRC within four years from the end of the tax year in which the loss has occurred and if you don’t normally complete a self-assessment tax return then you should write to HMRC.
While trying to time your realised gains and losses is generally unfeasible, there is one way you can attempt to make your losses go further, but it comes with risks. This is to reinvest a gain into an Enterprise Investment Scheme (EIS) which immediately allows you to defer any CGT bill arising on that gain. This would enable you to carry forward a loss from the same tax year, to be used more effectively in the future. EIS's are wrappers within which your money is invested in young start-ups but you must remain invested for three years (read more about EISs and their tax breaks here https://www.investorschronicle.co.uk/ideas/2021/04/13/vct-or-eis-which-is-best/ IC April 16 2021)
“What you are doing,” says Etherington, “is playing with the timeline. You are dragging a gain from the past into the present when you crystallise your EIS investment after three years, and now you’ve got that carried forward loss sitting behind it.”
But, he warns, “EIS's are not a have-your-cake-and-eat-it product, and you may in fact lose more money”.
Finally, where a crypto holding has become worthless, you might be able to argue that the asset has negligible value. “This is usually done with shares when a company goes into liquidation and in principle the same might apply to a coin issued by a business,” says Etherington.