Q: I’ve got thousands of pounds invested in non-fungible tokens (NFTs) and crypto and am worried about the news that NFT values have plunged and that bitcoin has lost more than half its value in just six months. Can I claim back tax on digital assets that have made significant losses? I am UK resident and domiciled.
A: Geoffrey Todd, private client and tax partner at Boodle Hatfield, says although not explicitly confirmed by HMRC, the tax treatment of non-fungible tokens (NFTs) is expected to be similar to that of other cryptoassets. If you’re tax resident in the UK, unless you’re trading very large amounts of cryptoassets, capital gains tax is likely to apply to any losses you make. If you are trading, income tax will apply. From a tax perspective, any losses on your cryptoassets only come into being when you realise those losses — in other words, when you exchange your tokens for money, for goods or services, or for a different type of token (including swapping one NFT for another).
Giving your tokens away to someone other than your spouse or civil partner (or a “connected person”) would also count as realising your losses. Regardless of any fluctuations in the value of your cryptoassets while you have owned them, you will only have made a loss for tax purposes if the value of the cryptoassets when you dispose of them is less than when you acquired them. Certain costs incurred in acquiring and disposing of the cryptoassets like transaction fees and some exchange fees can be deducted, which may reduce the gain or result in a loss. If you’ve realised taxable gains on other assets in the same tax year, these can generally be offset by your crypto losses. If you don’t have any gains to offset this tax year, you can carry forward any unused losses to offset gains in future tax years. However, you can’t use losses in this tax year against taxable gains made in previous years, including gains you made on crypto trading in previous years. From the end of the tax year in which you realised the loss, you have four years to register the loss with HMRC. If you don’t normally complete a self-assessment tax return then you should write to HMRC. If all of your holding in a particular cryptocurrency or cryptoasset has become worthless, you can hold on to these assets and make what’s called a negligible value claim to HMRC. If your claim is successful, you’ll be treated for tax purposes as having disposed of your holding or asset and immediately reacquired it at its negligible value. This means you’ll be treated as having made a loss which you can use as outlined above, even though you are still holding on to the assets. However, this will give you a new reduced acquisition cost by which any future gains will be calculated. Therefore you might want to avoid this if you don’t have any gains to offset or you think the value of your asset is likely to recover.