How to manage crypto losses on tax returns in the US, UK and Canada

Cryptocurrency taxation is a subject of increasing importance, with governments worldwide working diligently to establish clear rules for taxing digital assets. In the United States, the United Kingdom, and Canada, crypto holders navigate complex regulatory landscapes, making it crucial to understand how crypto losses are taxed and their potential impact on tax liability. Whether new to crypto trading or with years of experience, reporting income and paying applicable taxes in compliance with local regulations is essential.

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

Taxation of crypto losses in the United States

U.S. approach to crypto taxation

In the U.S., the Internal Revenue Service (IRS) requires all sales of crypto to be reported, as it classifies cryptocurrencies as property and subject to capital gains tax. Gains and losses from crypto transactions are categorized by their duration, allowing losses to offset gains and reduce overall tax liabilities.

Unless generating staking-related interest or other exceptional cases, cryptocurrencies kept in a portfolio are typically not subject to IRS taxation. Furthermore, a loss cannot be declared if an individual has invested in a cryptocurrency that has completely lost its value and is no longer traded on exchanges.

Maintaining precise transaction records is essential for accurate capital gain or loss calculations. Moreover, reporting both losses and gains is mandatory, and the IRS is actively enforcing compliance with penalties for inaccuracies.

How are crypto losses taxed and offset in the U.S.?

In the U.S., crypto losses are typically categorized as capital losses, arising when the value of cryptocurrency holdings decreases from acquisition to the point of sale, exchange or use. Reporting crypto losses can reduce taxes in two ways: through income tax deductions and by offsetting capital gains.

When losses surpass gains, the resulting net losses can be utilized for income tax deductions, allowing for a reduction of up to $3,000 from 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 offer substantial tax savings, offsetting capital gains without restrictions on the amount, potentially avoiding a substantial tax liability. The IRS categorizes losses as short-term or long-term, following the traditional investment framework. Short-term losses from assets held for under a year are taxed at ordinary rates (10%–37%), while long-term losses from assets held over a year face lower capital gains tax rates (0%–20%).

Wash-sale rule and treatment of crypto losses in the U.S.

In the U.S., investors can engage in tax-loss harvesting with cryptocurrency, selling at a loss to reduce taxes due to the IRS’ property classification. Since the IRS treats cryptocurrencies as property rather than capital assets, it technically exempts crypto from wash-sale rules and allows more flexibility.

Crypto holders can utilize losses to offset gains without being bound by the wash-sale rule, enabling them to sell at a loss, realize tax benefits, and reinvest to maintain their position. Nevertheless, regulatory changes might extend the rule to crypto in the future, making safer strategies advisable to minimize capital gains.

Taxation of crypto losses in the United Kingdom

The U.K.’s approach to crypto taxation

In the U.K., claiming cryptocurrency losses on a tax return is an essential step in reducing overall tax liability. To initiate the process, it’s critical to keep thorough records of every crypto transaction.

His Majesty’s Revenue and Customs (HMRC) considers cryptocurrencies as taxable assets, meaning that trading or selling crypto can incur a tax liability. Since cryptocurrency is currently treated by HMRC similarly to the majority of other financial assets, it is subject to record-keeping requirements and Capital Gains Tax (CGT). The type of transaction determines the exact tax treatment.

In the U.K., the capital gains tax is a consideration for individuals trading in cryptocurrencies. The CGT rates are directly connected to the taxation of crypto losses and the utilization of tax-free thresholds. The current CGT rates range from 10% to 20%, depending on the individual’s income and gains.

How are crypto losses taxed and offset in the U.K.?

When reporting crypto losses, the CGT section of the Self Assessment tax return must be completed. This section enables the offset of capital losses against any capital gains incurred during the same tax year.

In the U.K., investors are not permitted to directly offset capital losses from cryptocurrency against their income tax liability. However, when losses arise from…