Accounting for the Terra & Luna crash

Blockchain
26.05.22
This article acts a broad guide and does not constitute specific personalised advice to readers’ tax and financial situations, nor investment advice - always consult a qualified professional before making any financial decisions.    We’ve been working closely to support our clients since the UST peg started to wobble on May 7, which subsequently resulted in investors and companies holding UST and Luna losing significant amounts of value in their portfolio.  Depending on if and when people or companies sold, it may have affected their gains and losses.

This article acts a broad guide and does not constitute specific personalised advice to readers’ tax and financial situations, nor investment advice - always consult a qualified professional before making any financial decisions.   

We’ve been working closely to support our clients since the UST peg started to wobble on May 7, which subsequently resulted in investors and companies holding UST and Luna losing significant amounts of value in their portfolio.  Depending on if and when people or companies sold, it may have affected their gains and losses.    

Accounting for gains and losses is important to all of those affected, and we wanted to share a quick FAQ article with the community based upon our interactions with clients over the past fortnight.    

We’ve divided the article up into sections based upon personas: 

SELF ASSESSMENTS (UK SPECIFIC) 

Scenario analysis of individuals who will complete self assessments: 

Self assessments (UK specific)

What options do I have to reduce the tax burden? 

  • If you sold your tokens in the past fortnight or sell your tokens before 5th April 2023, you will be able to offset a loss in the current tax year and carry it forward to future years.
  • If you didn’t sell your tokens, you may be able to submit a negligible value claim (where an asset effectively becomes worthless but still exists) and you can offset this on your tax return against gains as well. 
  • You will have to wait for the tax year end (5th April 2023) in order to claim
  • If you are struggling to sell your tokens then another option is to swap, as a swap is viewed as a disposal.
  • You could also gift your crypto to someone, who isn’t your spouse, as another method of realising the loss. 
  • Of all these options, be careful of the 30 day and same day Bed and Breakfast rules. 

What information do I have to show? 

  • In order to claim a loss you need to be able to demonstrate the sale of these assets and the easiest way for crypto is via wallet addresses on the blockchain

Do I pay tax on anchor protocol or earnings (e.g. from staking, liquidity pools)?

  • All interest earned on the Anchor protocol, via staking (e.g. Binance), earnings from exchanges (e.g. Nexo) and liquidity pools will be subject to income tax under miscellaneous income on a tax return

LIMITED COMPANIES & CRYPTO NATIVE PROJECTS

Scenario analysis of individuals who will complete self assessments: 

Limited companies

When do I need to account for this? 

  • You will need to write off the balance held in your financial statements and the loss will be either unrealised or realised depending on if the asset has been sold or not. 

Can anything be off-set?

  • You can offset realised losses against realised gains in the same accounting period. 

Crypto-native projects

I had profits stored/treasury in UST - what do I do? 

  • Firstly, speak to your accountant or inhouse finance team to discuss the potential further repercussions on the business and cashflow. If this will cause a knock on effect it may be worth considering liquidating other crypto assets to ensure you can secure funds in other stablecoins or potentially even fiat. 

What happened with the terra ecosystem is a clear indication of the risks of operating in the crypto space. Whilst we are huge advocates and believers that the future of finance will be within the blockchain and crypto industry we are also well aware of the risks. 

Our key takeaways are:

  1. Consider your treasury management and the risk appetite of the business
  2. Continuously monitor positions to ensure the risk appetite is being followed
  3. Review and manage ongoing cash flow and liabilities as you don’t want to be stuck without fiat or stablecoins to pay staff or bills

Our team is available to discuss tax implications stemming from the recent terra events, any cryptocurrency positions you hold as well as any crypto-related business you’re looking to build.  Complete our contact form and one of our advisors will be in touch, or reach out directly to our founder Joe David.