Cryptocurrency markets are being rocked as tokens supposed to be pegged to the dollar have faltered amid worries about high inflation and rising interest rates.
In a so-called "crypto winter" that has lost investors billions, the terra luna (LUNA1-USD) token fell from a high of $118 (£96), last month, to $0.09 on Thursday.
The collapse had a knock-on effect on a linked token, TerraUSD (UST-USD), which is normally stable.
Spooked investors are now pulling out of major cryptocurrencies, sending markets plummeting.
The world's second largest cryptocurrency ethereum (ETH-USD) crashed in value by 20% in just 24 hours before starting its recovery to trade at $2,070 on Friday. More than $200bn has been wiped off the cryptocurrency market.
Bitcoin (BTC-USD) was trading near $30,000 and set for a record losing streak as cryptocurrencies nursed large losses.
But UK crypto asset investors can “bank” losses with the tax authorities and offset against future gains.
Crypto assets are unregulated financial products in the UK. However, when it comes to taxation, HMRC views cryptocurrencies like bitcoin in the same way as traditional investments like stocks and shares.
“For the last few years, crypto investors have had to worry about tax liabilities on sale following dramatic increases, but now the tide has turned. Few investors realise that losses can be banked with HMRC and offset against future gains,” Paul Webster, a director in the private client tax team at Kreston Reeves, said.
“The sale of crypto assets is seen by HMRC as a disposal attracting capital gains tax payable at 20%. However, when a sale is made at a loss, which will be a reality for many investors, those losses can be used to offset future gains on other investments, such as investment property.”
HMRC works with large crypto exchanges, requiring them to share customer information. It is now using that data to send out “nudge” letters, reminding investors of their responsibilities and liabilities.
“Losses need to be claimed within four years of the end of the tax year in which they were realised, meaning losses made in May 2022 must be claimed by 5 April 2027.
“Investors may also find the cost of disposing of some crypto assets will be more than the value of those assets and may, understandably, choose to do nothing. Yet, even if an asset is not sold, it is possible to bank a ‘negligible value claim’ with HMRC.
“HMRC guidance allows claims to be made when a crypto asset becomes worth ‘next to nothing’. Negligible value claims do not require the crypto asset to be sold and losses can be carried forward indefinitely.
“With the EU looking to ban anonymous crypto asset transactions and the Financial Action Task Force aiming to tighten money laundering regulations for exchanges and custodians, tax authorities will inevitably have enhanced data on individuals making gains. With that in mind, investors would do well to bank losses now.”
Each UK investor is granted an annual capital gains allowance of £12,300 which can be used on crypto assets.
And since the rules of capital gains tax (CGT) apply, investors can also give assets to their spouse or civil partner without triggering a CGT event. This can effectively double the allowance.
“The taxation of crypto assets, particularly in relation to other income and assets, is complex. Investors should always take advice," Webster said.