Taxation of cryptocurrencies has become an increasingly important topic, as governments around the world are working hard to establish clear rules for taxing digital assets. In the US, UK and Canada, cryptocurrency holders navigate a complex regulatory environment, making it necessary to understand how cryptocurrency losses are taxed and their potential impact on tax liabilities. Whether you are new to cryptocurrency trading or have years of experience, reporting income and paying applicable taxes in accordance with local regulations is essential.

To comply with local cryptocurrency tax laws, cryptocurrency holders must stay informed and compliant to avoid legal issues. This article discusses the rules, deductions, and implications an investor needs to know to stay compliant and minimize tax liabilities in this ever-changing tax landscape.

Taxation of cryptocurrency losses in the United States

The US approach to taxing cryptocurrencies

In the United States, the Internal Revenue Service (IRS) requires reporting of all cryptocurrency sales, as cryptocurrencies are classified as property and subject to capital gains tax. Gains and losses from cryptocurrency transactions are classified by their duration, allowing losses to offset gains and reduce overall tax liabilities.

Unless ownership interests are generated or other exceptional circumstances, cryptocurrencies held in a wallet are typically not subject to IRS taxes. Furthermore, a loss cannot be declared if an individual invests in a cryptocurrency that has completely lost its value and is no longer traded on exchanges.

Maintaining accurate records of transactions is essential for accurate calculations of capital gains or losses. Furthermore, reporting of both losses and gains is mandatory, and the IRS actively enforces compliance with penalties in the event of inaccuracy.

How are crypto losses taxed and compensated in the US?

In the United States, cryptocurrency losses are typically classified as capital losses, which arise when the value of cryptocurrency collectibles declines from acquisition to the point of sale, exchange, or use. Reporting cryptocurrency losses can reduce taxes in two ways: through income tax deductions and capital gains offsets.

When losses exceed gains, the resulting net losses can be used for income tax deductions, allowing for a reduction of up to $3,000 of income, and any remaining excess losses can be carried forward to offset future capital gains and $3,000 of other income in subsequent years. .

Cryptocurrency losses provide significant tax savings, offsetting capital gains without limits on the amount, potentially avoiding significant tax liabilities. The IRS classifies losses as short-term or long-term, following the traditional investment framework. Short-term losses from assets held for less than a year are taxed at regular rates (10%-37%), while long-term losses from assets held over a year face lower capital gains tax rates (0%-20%).

US Cryptocurrency Wash Sale and Loss Treatment Rule

In the US, investors can engage in tax loss harvesting using cryptocurrencies, and sell at a loss to reduce taxes due to the IRS estate classification. Since the IRS treats cryptocurrencies as property rather than capital assets, it technically exempts cryptocurrencies from the sale rules and allows for more flexibility.

Cryptocurrency holders can leverage losses to offset gains without adhering to the buy-and-sell rule, enabling them to sell at a loss, realize tax benefits, and reinvest to maintain their positions. However, regulatory changes may expand the rule to include cryptocurrencies in the future, making safer strategies advisable for minimizing capital gains.

Taxation of cryptocurrency losses in the UK

The UK’s approach to taxing cryptocurrencies

In the UK, claiming cryptocurrency losses on your tax return is an essential step in reducing your overall tax liability. To begin the process, it is important to keep comprehensive records of every crypto transaction.

HMRC consider cryptocurrencies to be taxable assets, which means that trading or selling cryptocurrencies can give rise to tax liabilities. Because HMRC currently treats cryptocurrencies similarly to the majority of other financial assets, they are subject to record keeping requirements and capital gains tax (CGT). The type of transaction determines the exact tax treatment.

In the UK, capital gains tax is a consideration for individuals trading cryptocurrencies. CGT rates are directly related to the taxation of cryptocurrency losses and the use of tax-free limits. Current CGT rates range from 10% to 20%, depending on the individual’s income and earnings.

How are crypto losses taxed and compensated in the UK?

When reporting cryptocurrency losses, you must complete the CGT section of your self-assessment tax return. This section allows capital losses to be offset against any capital gains incurred during the same tax year.

In the UK, investors are not allowed to directly offset capital losses resulting from cryptocurrencies against their income tax liabilities. However, when losses arise from cryptocurrency transactions, they can be deducted from the total capital gains in the tax year.

If total losses exceed gains, remaining losses can be carried forward to offset future gains. This mechanism serves as a valuable tool for managing tax liabilities, especially in the volatile cryptocurrency market, which has the potential for significant losses and gains.

Importantly, there is no immediate requirement to report cryptocurrency losses. However, if you claim it, 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 evaluation and loss claims consistent with individual tax planning.

Overall, by accurately recording and reporting cryptocurrency losses, individuals can take full advantage of the tax relief provided by the UK government while effectively managing their cryptocurrency tax liabilities. You will lose the ability to move forward if this step is neglected.

Improved UK cryptocurrency tax reporting through token pooling

It is worth noting that HMRC requires taxpayers to pool their tokens to calculate cost bases in cryptocurrency transaction gains/losses reports. Tokens must be sorted into pools, each with a pool cost associated with them. When selling tokens from a pool, a portion of the pooled cost can be deducted (along with allowable expenses) to reduce the gain.

The combined cost must 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 proportional amount is deducted from the pooled cost.

Taxation of cryptocurrency losses in Canada

Canada’s approach to taxing cryptocurrencies

The Canada Revenue Agency (CRA) considers cryptocurrency property and is taxed as a commodity, falling under the categories of business income or capital gains. Disposing of cryptocurrencies, such as selling them, trading them for another cryptocurrency or using them to make purchases, will result in capital gains tax.

In Canada, purchasing or holding cryptocurrency is not taxed, as it is not considered legal tender. Therefore, their use for payments is viewed as a barter transaction with corresponding tax consequences, resulting in potential capital gains or losses based on the change in value of the cryptocurrency when it is exchanged for goods or services.

While cryptocurrencies offer some anonymity, the Canadian government has the ability to track cryptocurrency transactions as exchanges are mandated to report transactions over $10,000. Even transactions below the threshold may require disclosure of customer data at the request of the TRA.

How are crypto losses taxed and compensated in Canada?

In Canada, investors need to report capital losses to the CRA to reduce their tax liabilities, as the agency mandates the filing of income tax and benefit proceeds for any sale of capital property, regardless of the profit or loss outcome.

Canadian cryptocurrency taxpayers can offset various capital gains with cryptocurrency losses, carry the net loss forward or use it to offset gains from the previous three years. However, cryptocurrency losses cannot be used to offset ordinary income during the year, and 50% of cryptocurrency losses can be applied to offset capital gains in subsequent years or rolled back to prior years, reflecting the tax treatment of cryptocurrency capital gains.

Normally, when an allowable capital loss occurs during a tax year, it must initially be offset against any taxable capital gains during the same year. If there is still an unutilized loss, it is contributed to the net capital loss calculation for that year, which can then be applied to reduce taxable capital gains in any of the previous three years or any future year.

It is important to highlight that to gain the tax benefits, investors must “realize” their loss by selling the cryptocurrency, exchanging it for another, or using it to buy; Unrealized losses cannot be claimed on the tax return.

Surface Loss Rule and Treatment of Cryptocurrency Losses in Canada

Canada’s superficial loss rule, similar to the wash sale rule in the United States, prevents investors from exploiting artificial losses by immediately selling and repurchasing the same property within specified time frames, ensuring a fair tax system.

According to the CRA, this rule is triggered to prevent laundry sales if two conditions are met:

• The taxpayer or his representative obtains identical cryptocurrency within 30 days before or after its sale.
• By the end of this period, the taxpayer or his dependent person owns or is entitled to receive the same cryptocurrency.

These losses cannot offset the capital gains, but are instead added to the adjusted cost base of the repurchased property.