Offsetting crypto losses won’t prevent income tax bankruptcies

July 21, 2022

It may be a long time before brave retail investors discover whether or not cryptocurrency is shrouded in the emperor’s new clothes. Collapses of crypto-based businesses all over the world in recent weeks have followed an estimated $250bn fall in valuations of digital currencies, led by Bitcoin and Ethereum. HMRC is, unsurprisingly, up to speed with the tax treatment of crypto assets and liabilities, but risk remains for stricken holders  hoping to mitigate their financial positions.

First the good news: UK crypto investors can “bank” losses with HMRC to offset against future gains. Profitable disposals, as with other investments, attract capital gains tax at 20%. Sales at a loss, however, can offset future gains on other types of investments, such as shares or property. Losses need to be claimed within four years of the end of the tax year in which they were realised.

It is also possible to bank a ‘negligible value claim’ with HMRC when a crypto asset becomes worth ‘next to nothing’. No sale is needed and the window for carrying forward is indefinite. This rule also applies to ‘lost’ crypto assets, for example if a private key or password can’t be retrieved .

Fraud is different, however. Negligible value and capital losses are allowed if proof of holding at some point can be established; but not receiving cryptoasset tokens that were paid for are unlikely to be seen as a disposal since the individual still owns the stolen asset and has a right to recover it.

Employees of crypto businesses, or external consultants to those enterprises, may yet face a major risk if they are paid in cryptocurrencies. In such cases, individuals are subject to income tax on the asset’s market value at the time of payment. A subsequently bombed-out valuation may not deliver enough cash to meet the income tax liability. If there is no way of meeting the bill, there is a good chance that HMRC will seek a bankruptcy order.

Guidance from HMRC, including updates, is available here.

If you are a crypto investor facing bankruptcy, or a business in need of forensic accounting, asset tracing and other services to recover funds from a crypto-focused business, please don’t hesitate to get in touch with us at Buchler Phillips for a free initial consultation.

Written by Philip Norvell, Manager at Buchler Phillips, the UK’s leading independent corporate recovery, restructuring and turnaround firm.


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