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.