The Fizz! Blog

Claiming Capital Losses

If you sell assets like rental properties, shares or cryptocurrency at a profit, you have to consider whether you have Capital Gains Tax (CGT) to pay for the tax year.  But you might also have sold some other assets at a loss in the year - if so, you can deduct those losses from your profits to get to a net profit or loss for the year.

If you wind up with net gains, but they’re less than the Annual Exemption - this year, £12,300 - then there’s no CGT to pay and you move on.

If you wind up with net losses, then you get to hang on to them.  If, in a future year, you have net gains over the Annual Exemption, then you can set those old losses against them, using just enough to get down to the Annual Exemption and eliminate any tax that would otherwise be due, and carrying anything left forward still further.  It might be that you never have sufficient gains in a future year to ever use them, in full or at all, but they’re there if you do.

Capital losses are about to become more valuable, because the Annual Exemption is being cut sharply.  Next year, it’ll be only £6,000, the year after, £3,000.  That means that more taxpayers will be dragged into the CGT net.

There’s an easy trap to fall into.  In order to establish entitlement to most losses, you generally have to claim them within four years of the tax year they occur in (there’s a shorter deadline for some niche cases).  That could be on your Self Assessment Tax Return, if you have to submit one for the year, or you could just do it by letter or some other way.  But you have to somehow tell HMRC before that deadline.  We recently saw a case where someone had losses in 2013-14, and gains over the Annual Exemption in 2021-22.  Unfortunately, HMRC hadn’t been told about the losses, so it was too late for the taxpayer to take advantage of them.  Fortunately, the losses weren’t enormous.

A final consideration - you might need to make a judgement about how much effort you’re prepared to put into quantifying losses that you’re not certain will be useful.  If someone is pretty sure that they’ve got losses this year, but they’ll have to put research time into establishing the history of the share transactions, or pay an adviser to work out the actual loss, should they do it when they don’t anticipate having an opportunity to use the loss in future? To begin with they can kick the can down the road, by making a note for three years’ time to look at it again.  The point will come, though, where they have to make a judgement on whether to do the work before the deadline passes.

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Investing in cryptocurrency? Here’s how the tax side works

Cryptocurrency and tax has fast gone from being a largely theoretical subject to a quite practical one. Buying and selling them has become both more popular and more easy, and far more people are having to address the consequences of the activity now.

So, how are profits on selling cryptocurrencies taxed on an individual?

For 99.99% of people it’s a Capital Gains Tax (CGT) matter. CGT is fundamentally a tax on disposals (i.e. sales) of assets. The principles and calculations are the same ones you’d follow when figuring out CGT on profits from selling shares. Most people seem to assume that the fluctuating value of their cryptocurrency during the year has some impact, but it doesn’t. Similarly, often people think that the value of what they hold at the end of the tax year makes a difference, but it doesn’t. If you don’t sell any cryptocurrency, there’s nothing to declare and no gain to tax. It doesn’t matter if you bought it for £10,000 and it’s now worth £200,000. It’s not until you actually sell something that tax becomes a consideration.

A useful thing to bear in mind is that we can all make some capital gains free of tax each tax year. For 2021-22, your first £12,300 of capital gains are tax-free and it’s only the surplus above that amount that’s taxable. If your gains are below £12,300 and the total proceeds are less than four times that amount - £49,200 - then you don’t even need to tell HMRC about the transactions at all.

So, what are those principles?

Let’s say you sell some Ethereum for £15,000. You need to figure out how much it cost you. This might be quite simple. If that’s all the Ethereum you have, and you bought it all in one go for £7,000, you’ve a profit of £8,000 to be taxed. Easy!

What if you didn’t buy it all in one go? If you’ve bought Ethereum on two or more occasions, you have to keep track of all the times you bought Ethereum, and keep a running record of the average cost of each unit - a record of your “pool” of units and their average cost. Then, when you sell X units, you need to take the relevant number of units at the average cost out of the pool, and figure out the profit you made on selling them. Fairly easy!

There’s a further complexity, though. Sometimes you have to look at the units you bought afterwards as well. This is because of rules designed to stop people realising tax-free profits at the end of one tax year and then buying the same things back a day or two later at the start of the next. In our example, if you buy some Ethereum in the 30 days after you sell some, then you need to match that purchase against the disposal instead of the older units, and for tax purposes you’ll still be deemed to hold those older ones at their original cost. Not easy!

These rules are thorny enough for share trades, but there are a few factors that make them trickier still for cryptocurrencies:

1. Cryptocurrency transactions are often far more frequent. When you sell some shares, it’s usually fairly easy to identify when you bought them and how much for, and to therefore work out the profit you’ve made. With cryptocurrency there are often far more transactions to assess (though in fairness this may become more common in share trading too, as apps and push notifications encourage people to trade more frequently).
2. Most people do their share trading via a single broker account, but many people have multiple accounts/wallets for cryptocurrency. You might need to match a sale of cryptocurrency from one wallet against a purchase made via one or more other wallets.
3. A big trap is that you might not even dispose of cryptocurrency for actual money. If, say, you exchange some Ethereum for some Bitcoin, that represents a disposal of Ethereum to declare and pay tax on, even if you’ve no GBP to show for it. Someone may never have cashed out any cryptocurrency at all, but still have multiple taxable disposals. We’ve written about this before.
4. Similarly, you may use some cryptocurrency to pay for something - that represents a disposal of the cryptocurrency at its market value and a potential tax bill.
5. Finally, even if you gift the cryptocurrency to someone, that’s also a disposal at whatever its market value is at that point (unless you're gifting it to your spouse or civil partner, anyway), with tax to pay if you’ve made a gain - that’s the same with shares and any other assets too.

All this means that, for someone with complex cryptocurrency activities, some software that can pull everything together is likely to be necessary!

For the time being, the £12,300 annual exempt amount is likely to keep most people from having to report anything to HMRC (though if you make losses you might want to report them, so you can offset them against future gains). Even so, make sure you keep proper records - if you’ll be selling cryptocurrency in future it’s important to have your precise trading history on record so that you can figure out the profit on each disposal when the time comes.

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