Daily Tax Report: International

U.K. Crypto Traders Can Use Losses to Offset Profits, Reduce Tax

Dec. 19, 2018, 9:30 AM

The U.K. will allow cryptocurrency traders to use losses from trading to offset future profits, a boost to an industry that faced substantial losses in 2018.

By offsetting profits, traders would be able to reduce their income tax liability. The guidance, released Dec. 19, narrowly defines who can qualify as a cryptocurrency trader, making the impact of the provision potentially narrow.

The 100 largest cryptocurrencies, by market capitalization, have fallen from a high of $830 billion in January to $137 billion as of Dec. 18, according data provider CoinMarketCap.

Bitcoin, the most widely traded cryptocurrency, peaked on Dec. 17, 2017, at $19,511 per token. Since then it has nosedived. It is currently trading at $3,535.

The guidance makes Her Majesty’s Revenue and Customs, the U.K. tax authority, the first in the world to publish detailed guidance on how cryptocurrency assets are taxed for individuals, an HMRC spokesman said in a release.

Defining Traders

The guidance comes one month before companies and individuals must file tax returns, which will provide clarity and an opportunity to use this year’s major trading losses to offset income tax.

“HMRC is defining traders very narrowly and the types of people that fit this category will often trade other types of financial securities such as bonds and shares. The ability to offset losses against this will be significant,” said Charlie Taylor, CEO of cryptocurrency comparison site CryptoCompare.

Taylor emphasized that it would be quite difficult for retail investors to meet this threshold.

The guidance points out that the U.K. tax authority will classify a cryptoassets trader as it would a trader in shares, securities and other financial products.

“Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself,” the guidance said.

The government hasn’t defined a trader, detail that will come in future guidance.

Capital Gains Tax

In addition to allowing traders to offset losses, the government said they would allow individuals, but not traders, to use certain costs to offset capital gains taxes.

Those costs could include the original price of the cryptoasset, any transaction fees incurred to buy these assets, and the “professional costs to draw up a contract for acquisition and disposals.”

Electricity costs involved in mining activity, a process for creating new tokens that often involves verifying additions to a centralized ledger, can’t be used to offset costs, the government said.

This is significant as the major cost in mining cryptocurrency assets is the electricity used power computers that carry out these calculations.

To contact the reporter on this story: Hamza Ali in London at hali@bloombergtax.com

To contact the editors responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

To read more articles log in. To learn more about a subscription click here.