Understanding Tax Treatment of Crypto Losses for the US, UK, and Canada

  • November 16, 2023
  • Jennifer Moore
Understanding Tax Treatment of Crypto Losses for the US, UK, and Canada

Cryptocurrency taxes are getting more important. Governments worldwide are making rules for taxing digital money. In the US, UK, and Canada, people who own crypto deal with complex rules. It’s crucial to know how crypto losses affect taxes and what they mean for what you owe.

Whether you’re new to crypto or have been doing it for years, following local tax laws is a must. It helps you avoid legal problems and make sure you pay the right taxes.

This article helps you understand the rules and deductions for crypto investors. It guides you to stay within the law and pay less tax in the changing world of crypto taxes.

Tax Laws on Crypto Losses in the United States

The IRS in the U.S. needs you to report all crypto sales. They see cryptocurrencies as property, so they’re subject to capital gains tax. Gains and losses from crypto trades are divided by how long you hold them. If you lose money, it can lower your tax bill.

Usually, cryptocurrencies in your portfolio don’t get taxed unless you earn interest from staking or in some rare cases. If a cryptocurrency becomes worthless and isn’t traded anymore, you can’t claim a loss.

Keeping accurate transaction records is vital for figuring out gains or losses. You have to report both losses and gains. The IRS is strict about this and can penalize you for mistakes.

Taxation and Offsetting in the United States

Crypto losses in the U.S. are seen as capital losses when the cryptocurrency’s value drops from when you got it to when you sell, trade, or use it. Reporting these losses can lower taxes in two ways: by deducting from income tax and balancing against capital gains.

When your losses are more than gains, you can use the leftover losses to deduct up to $3,000 from your income. One can carry any extra losses forward to offset future gains and $3,000 of other income in the coming years.

These losses can save a lot on taxes by balancing out gains, helping avoid a big tax bill. The IRS splits losses into short-term (assets held under a year) and long-term (assets held over a year), taxed differently at rates ranging from 0% to 37%.

Crypto Losses and the Wash-Sale Rule in the U.S.

In the U.S., investors can use tax-loss harvesting in cryptocurrency. By selling at a loss, they aim to reduce taxes since the IRS considers crypto as property, not capital assets. This unique classification exempts crypto from wash-sale rules, offering greater flexibility.

Crypto holders can employ losses to offset gains without being constrained by the wash-sale rule. This freedom allows them to sell at a loss, gain tax benefits, and reinvest in their holdings. However, potential future regulatory changes might extend this rule to crypto, advising a more cautious approach to minimize capital gains.

Tax Laws on Crypto Losses in the United Kingdom

To reduce the total tax burden, claiming the crypto losses on tax returns is a crucial step in the United Kingdom. Therefore, to start the process, it’s important to keep track of every crypto transaction. 

HMRC (His Majesty’s Revenue and Customs) takes crypto as a taxable asset. This means that selling or trading with cryptocurrencies is under tax liability. Like other traditional currencies, cryptocurrencies are also under the HRMC, thereafter, individuals are required to keep records, and CGT (Capital Gains Tax). The tax treatment depends on the type of transaction. 

In the United Kingdom, the Capital Gains Tax is for individuals dealing with crypto transactions. These rates directly connect to the use of tax-free thresholds, and taxation of crypto losses. The present CGT rates range between 10% to 20% and depend on a person’s income and profit margins. 

Taxation and Offsetting in the United Kingdom

It is crucial to complete the Capital Gains Tax of the self-assessment tax returns when you report the crypto losses. The section also includes the offset of any crypto losses on any capital gains that took place in the same tax year.

In the United Kingdom, investors do not have permission to directly offset capital loss from cryptocurrencies against their tax responsibilities. In case there are losses from crypto transactions, the same amount deducts from the total capital profits in the tax year. 

If the total amount of loss is more than the total amount of profits, the rest of the loss adds to the future profits on the capital amount. It is a potential tool for managing tax responsibilities, especially within the highly volatile crypto market. Since it has the means for a significant amount of losses and profits. 

However, there is no need to report any crypto losses immediately. However, if an individual is planning to claim them, there is a 4-year window from the end of the particular tax year where the losses took place. This time frame allows the taxpayers to assess their financials for tax planning, and the loss claims. 

Thereafter, if a person properly keeps a record of their crypto transactions, and reports the crypto losses, they can enjoy the tax relief imposed by the government of the United Kingdom. To carry these forward, it is crucial to maintain the following steps. 

Token Pooling to Optimize Crypto Tax Reporting in the United Kingdom

To calculate the cost of crypto transactions for loss and gain reports, the HMRC suggests the taxpayers pool their tokens. It is crucial to categorize tokens into pools. Every category has a related pool price. Once you sell tokens from a pool, a part of the cost might deduct to reduce the profits.

With every new purchase of crypto or tokens, the pooled cost requires a recalculation. When an individual acquires tokens, the purchase amount adds to the pool. Once you sell the cryptocurrencies, an amount deducts from the pooled cost.

Tax Laws on Crypto Losses in Canada

The CRA or Canada Revenue Agency takes crypto as a subject or commodity for taxation. As this falls under the category of capital gains, and business income. What triggers the capital gains tax are selling the crypto, or trading it for another crypto. 

Since cryptocurrencies are not considered legal tender in Canada, no taxes are imposed for holding or purchasing cryptocurrencies. Thereafter, the use of crypto for payments is regarded as a barter transaction, however with tax consequences. After that, it results in potential capital losses or losses on the value change of the cryptocurrency for services or products.

Crypto is anonymous, yet the Canadian government has the potential to trace any crypto transaction. This is because the exchanges are liable to report any transaction over $10,000. Even with CRA’s request, sub-threshold transaction data disclosure is also available. 

Taxation and Offsetting in Canada

To reduce tax responsibilities, taxpayers need to report their capital losses to the Canada Revenue Agency. This is also because the agency has made it mandatory for investors to file benefit returns and income tax for any capital property sale irrespective of a profit or a loss. 

The crypto taxpayers in Canada can offset several capital gains with crypto losses. After that, take the net loss forward or use it to offset gains from the prior 3 years. However, one cannot utilize the crypto losses to offset the regular income within the year. Moreover, the investors can apply for 50% of the crypto losses to offset capital income in the coming years, or even carry them to the earlier years. This mirrors the crypto capital gains treatment of taxes. 

In general, when in a year, allowable capital loss takes place, it is primarily offset against any capital gains taxable within the same year. However, if there is a utilized loss, it then adds up to the total capital loss that year. One can further apply this to reduce the capital gains in any of the early three years or any of the future years. 

However, it’s crucial to understand that the investors must realize their losses after selling cryptocurrencies or exchanging them, thereafter to access the tax benefits. One cannot claim the unrealized losses for tax benefits.

Superficial Loss Rule in Canada

Similar to the US’s wash sale rule, Canada’s superficial loss rule refrains investors from artificial losses by immediately purchasing a property after selling within a certain timeframe. Thereafter, to ensure a fair tax system. 

As per CRA, the superficial loss rule comes into play to prevent wash sales under two conditions:

  1. The investor or the taxpayer receives a similar or identical cryptocurrency within 30 days after or before selling it. 
  2. By the end of the 30 days, the taxpayer or the investor has the right to receive the same currency. 

However, these losses cannot offset the capital gains. However, they are added to the cost base of the repurchased property. 

Also Read- Are Businesses Accepting Crypto, Really Fuelling Crypto Adoption?

In Conclusion

It requires precision to navigate the crypto losses in tax regimes like the US, UK, and Canada. Understanding the rules, deducting losses against gains, offsetting taxes, and tackling regulatory variations is crucial. Accurate record-keeping is your ally. Investors must stay vigilant, follow guidelines, and optimize their tax situation wisely to ensure compliance. Thereafter, to minimize liabilities in the ever-evolving world of crypto taxation.

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