Let’s be honest, a lot of money has been lost in the crypto market this year already, with more than £300 billion alone lost in the first month of 2022, which has led many crypto investors to believe a bear market is coming.
This means one thing for us:
Support you in understanding how to deal with your crypto taxes in a bear market.
So, let’s kick off.
Tax Loss Harvesting
If you’re well versed with the crypto market, you’ll know that not every crypto currency or NFT purchase you make will be a success.
Whilst a harsh truth, there are ways for those in a situation where your asset is not performing quite as well as you’d hoped for.
Intrigued?
Good.
Tax Loss Harvesting is a strategy for when an asset has a market value lower than its base cost, and you dispose of the asset before potentially purchasing another asset to replace the underperforming one.
By doing this you will crystallise your capital losses upon disposal which can then be used to offset any other capital gain you may have.
This can be used in the year you harvested the losses or any year going forward, indefinitely, as long as you report the losses to HMRC no more than 4 tax years after the disposal.
However, like with anything, you should be weary of the pooling and bed and breakfast rules.
Unfortunately, you cannot repurchase the asset within 30 days or the sale and purchase would be grouped together, thus negating the loss harvesting.
Negligible Value Claims
Similar to Tax Loss Harvesting, however, this directs the focus to crypto currencies and NFT’s where the value has been impaired to a state where it is negligible in value or where your beneficial interest in the asset is of negligible value. If you have invested on the Celsius platform, this could apply to you.
HMRC does not have a definition for this, but any asset where its value plummets to a minuscule amount and is unlikely to bounce back could qualify.
By making this claim, we are able to treat the asset as if it were sold and repurchased on the same day (ignoring the bed and breakfast rules) thus crystallising losses without disposing the asset.
These losses can then be used to reduce your capital gains elsewhere or carried forward.
You should note that this claim reduces the base cost of the asset. Therefore, if on the off-chance the asset does rally and you do sell it, the gain would be much greater. I.e. what it would be if you had not made the claim, plus the loss you crystallised multiplied by your capital gains tax band rate.
Incorporating Your Assets
Perhaps you have been toying with the idea of your portfolio being placed into a limited liability company. If the majority of the income being generated from your crypto portfolio is under the income tax regime over the capital gains tax regime, this may be an appropriate option. It is imperative to correctly assess your portfolio prior to incorporating as this could have serious implications for your overall tax.
Incorporation Relief
If you have a sole trading business where the assets are generating income, you may be able to defer the capital gains tax on transferring the assets to the business. This may be viable for node income or an NFT project.
This particular strategy is somewhat limited for those investing in crypto, although not unheard of. In most other situations, there would be capital gains tax to pay from disposing your crypto assets and acquiring them via the limited company.
Any profits would be subject to capital gains tax on the individual making the disposal. However, as the markets are relatively low, this may be a perfect opportunity to take advantage of a lower tax liability, if any, for incorporating.
To note, this will depend on the market value when incorporation and the cost of the assets. This could be a great way to tax plan in a bear market with lower market values.
Final Tip for dealing with the Bear Market
You may find yourself in a situation where your portfolio has reduced in value due to the crypto market cycle all while having tax due in relation to a previous tax year.
Unfortunately, even crystallising losses will not reduce a historic capital gains tax bill as capital losses cannot be carried backwards.
Therefore, it would be wise to set aside tax as you are creating gains.
By estimating the tax bracket you will be in, you can set aside an appropriate proportion in fiat or a stablecoin. This should greatly aid with affording your tax bill going forward.
If you’d like further support or advice, please feel free to reach out and get in contact with us here at Myna.
