Cryptocurrency taxation is becoming increasingly important as governments worldwide strive to establish clear regulations for taxing digital assets. In countries like the United States, the United Kingdom, and Canada, crypto holders face complex regulatory landscapes, making it crucial to understand how crypto losses are taxed and how they can impact tax liability. Whether you’re new to crypto trading or have years of experience, it is essential to report income and pay applicable taxes in compliance with local regulations.
To avoid legal issues, crypto holders must stay informed and compliant with local cryptocurrency taxation laws. This article aims to provide an overview of the rules, deductions, and implications that investors need to know in order to stay compliant and minimize tax obligations in the ever-changing crypto tax landscape.
Taxation of crypto losses in the United States
In the United States, the Internal Revenue Service (IRS) requires the reporting of all crypto sales, as cryptocurrencies are classified as property and subject to capital gains tax. Gains and losses from crypto transactions are categorized based on their duration, allowing losses to offset gains and reduce overall tax liabilities.
Generally, cryptocurrencies held in a portfolio are not subject to IRS taxation unless they generate staking-related interest or fall under other exceptional cases. Additionally, a loss cannot be declared if an individual has invested in a cryptocurrency that has completely lost its value and is no longer traded on exchanges.
Maintaining accurate transaction records is crucial for calculating capital gains or losses correctly. Reporting both losses and gains is mandatory, and the IRS actively enforces compliance with penalties for inaccuracies.
How are crypto losses taxed and offset in the United States?
In the United States, crypto losses are typically categorized as capital losses, which occur when the value of cryptocurrency holdings decreases from acquisition to the point of sale, exchange, or use. Reporting crypto losses can reduce taxes in two ways: through income tax deductions and by offsetting capital gains.
When losses exceed gains, the resulting net losses can be utilized for income tax deductions, allowing for a reduction of up to $3,000 from income. Any remaining excess losses can be carried forward to offset future capital gains and $3,000 of other income in subsequent years.
Cryptocurrency losses offer significant tax savings, as they can offset capital gains without restrictions on the amount, potentially avoiding a substantial tax liability. The IRS categorizes losses as short-term or long-term based on the traditional investment framework. Short-term losses from assets held for under a year are taxed at ordinary rates (10%–37%), while long-term losses from assets held over a year face lower capital gains tax rates (0%–20%).
Wash-sale rule and treatment of crypto losses in the United States
In the United States, investors can engage in tax-loss harvesting with cryptocurrency, selling at a loss to reduce taxes due to the IRS’ property classification. Since cryptocurrencies are treated as property rather than capital assets by the IRS, they are technically exempt from wash-sale rules, providing more flexibility.
Crypto holders can utilize losses to offset gains without being bound by the wash-sale rule, allowing them to sell at a loss, realize tax benefits, and reinvest to maintain their position. However, regulatory changes may extend the rule to crypto in the future, making safer strategies advisable to minimize capital gains.
Taxation of crypto losses in the United Kingdom
The United Kingdom’s approach to crypto taxation
In the United Kingdom, claiming cryptocurrency losses on a tax return is a crucial step in reducing overall tax liability. It is essential to keep thorough records of every crypto transaction to initiate the process.
The United Kingdom’s tax authority, His Majesty’s Revenue and Customs (HMRC), considers cryptocurrencies as taxable assets. This means that trading or selling crypto can incur a tax liability. Cryptocurrency is currently treated similarly to other financial assets by HMRC, subject to record-keeping requirements and Capital Gains Tax (CGT). The specific tax treatment depends on the type of transaction.
In the United Kingdom, individuals trading in cryptocurrencies need to consider capital gains tax. The CGT rates are directly linked to the taxation of crypto losses and the utilization of tax-free thresholds. The current CGT rates range from 10% to 20%, depending on the individual’s income and gains.
How are crypto losses taxed and offset in the United Kingdom?
When reporting crypto losses, individuals must complete the CGT section of the Self Assessment tax return. This section allows for the offset of capital losses against any capital gains incurred during the same tax year.
In the United Kingdom, investors are not allowed to directly offset capital losses from cryptocurrency against their income tax liability. However, when losses arise from cryptocurrency transactions, they can be deducted from the overall capital gains in the tax year.
If total losses exceed gains, the remaining losses can be carried forward to offset future gains. This mechanism is a valuable tool for managing tax liability, especially in the volatile cryptocurrency market, which can see significant losses as well as gains.
It is important to note that there is no immediate requirement to report crypto losses. However, if you claim them, there is a four-year window from the end of the tax year in which the losses occurred. This flexibility allows taxpayers sufficient time for financial assessment and loss claims aligned with individual tax planning.
By accurately recording and reporting crypto losses, individuals in the United Kingdom can fully leverage the tax relief provided by the government while effectively managing cryptocurrency tax obligations. Neglecting this step may result in the loss of the ability to carry losses forward.
Optimizing crypto tax reporting in the United Kingdom through token pooling
It is worth noting that HMRC requires taxpayers to pool their tokens when calculating cost bases in cryptocurrency transaction gain/loss reporting. Tokens must be categorized into pools, each with an associated pooled cost. When selling tokens from a pool, a portion of the pooled cost (along with allowable expenses) can be deducted to reduce the gain.
The pooled cost should be recalculated with each token purchase or sale. When tokens are acquired, the purchase amount is added to the relevant pool, and when they are sold, a proportionate sum is deducted from the pooled cost.
Taxation of crypto losses in Canada
Canada’s approach to crypto taxation
The Canada Revenue Agency (CRA) considers cryptocurrency as property and subject to taxation as a commodity. Disposing of crypto, such as selling it, trading it for another crypto, or using it for purchases, triggers capital gains tax.
In Canada, taxes are not imposed on purchasing or holding cryptocurrency as it is not regarded as legal tender. Using cryptocurrency for payments is seen as a barter transaction with corresponding tax consequences, resulting in potential capital gains or losses based on the value change of the cryptocurrency when exchanged for goods or services.
While crypto offers some anonymity, the Canadian government has the ability to trace crypto transactions as exchanges are required to report transactions over $10,000. Even sub-threshold transactions may require customer data disclosure upon the CRA’s request.
How are crypto losses taxed and offset in Canada?
In Canada, investors need to report capital losses to the CRA to potentially reduce their tax liability. The agency mandates filing an income tax and benefit return for any capital property sale, regardless of whether there is a gain or loss.
Canadian crypto taxpayers can offset various capital gains with cryptocurrency losses, carrying the net loss forward or using it to offset gains from the previous three years. However, cryptocurrency losses cannot be used to offset regular income within the year. 50% of cryptocurrency losses can be applied to offset capital gains in subsequent years or carried back to previous years, following the tax treatment of cryptocurrency capital gains.
Usually, when an allowable capital loss occurs within a tax year, it should be initially offset against any taxable capital gains within the same year. If there is still an unutilized loss, it contributes to the net capital loss calculation for that year, which can then be applied to reduce taxable capital gains in any of the preceding three years or any future year.
It is important to highlight that investors must “realize” their loss by selling cryptocurrency, exchanging it for another, or using it for a purchase in order to access tax benefits. Unrealized losses cannot be claimed on a tax return.
Superficial loss rule and treatment of crypto losses in Canada
Canada has a superficial loss rule, similar to the wash sale rule in the United States, to prevent investors from exploiting artificial losses by selling and immediately repurchasing the same property within specific timeframes. This rule ensures a fair tax system.
According to the CRA, this rule comes into play if two conditions are met:
1. The taxpayer or their representative obtains an identical cryptocurrency within 30 days before or after selling it.
2. By the end of this period, the taxpayer or an affiliated person holds or has the right to acquire the same cryptocurrency.
These losses cannot offset capital gains but are instead added to the adjusted cost base of the repurchased property.