Advice + Tax + Accounts for smart business owners.
May 17th 2021

Cryptoassets: negligible value claims

An individual or company can sometimes make a "negligible value" claim in circumstances where exchange tokens they still own have become worthless or of negligible value.

The effect of such a claim is to crystallise the losses - in other words to treat the assets for tax purposes as if they had actually been sold at a loss.

Why are negligible value claims useful?

A negligible value claim could be particularly beneficial if the claimant has other chargeable gains against which the "allowable losses" can be offset, since this can reduce the net amount of gains subject to Capital Gains Tax (or Corporation Tax in the case of a company).

Even where there is no immediate opportunity to relieve an "allowable loss" arising from a negligible value claim, the loss can still be carried forward and offset against chargeable gains arising in the future, with no time limit placed upon this aspect.

A negligible value claim treats the asset in question as having been disposed of, for chargeable gains purposes, and then reacquired for its current value (which may be £nil). A claim would normally need to be made in respect of all tokens of the same type held by the claimant.

A negligible value claim would need to state:

  • the tokens which are the subject of the claim;
  • the amount at which the tokens are to be treated as disposed (possibly £nil); and
  • the date that the asset should be treated as disposed.

Example

Harry bought 1,000 "ABC tokens" for a total cost of £20,000 three years ago. On 5 April 2021 he still owns them, but they are now worth 1p each. Harry submits a negligible value claim to HMRC for all 1,000 tokens, claiming to treat them as being disposed on 5 April 2021 for 1p each or £10 in total.

Harry's allowable loss is calculated as the £10 "proceeds" less the £20,000 allowable cost = £19,990.

The £19,990 allowable loss can be offset against any other chargable gains arising in the same tax year, with any amount unrelieved in this way being carried forward to future tax years. If Harry has no other chargeable gains in 2020/21, then the entire allowable loss of £19,990 is carried forward to future tax years and relieved against any chargeable gains arising in future tax years.

In the unlikely event that the value of the "ABC tokens" were subsequently to recover and Harry then sold them, for chargeable gains purposes his allowable cost (for the entire pool of 1,000 tokens) would be £10.

Note that it is possible to backdate negligible value claims up to two years before the beginning of the tax year in which the claim is made, if the claimant owned the asset at the time and it was of negligible value at that earlier time. This can be useful if the claimant has no taxable gains in the current tax year, but did in the previous two.

I've lost the private key to my tokens - can I claim?

Misplacing the private key may prevent an individual or company from accessing their tokens, but this does not mean that the tokens have ceased to exist. For this reason, HMRC considers that the loss of a private key does not amount to a disposal for chargeable gains purposes.

Nevertheless, HMRC accepts that a negligible value claim could be made in this circumstance, provided it can be shown that there is no prospect of recovering the private key or accessing the tokens.

I've been defrauded - can I claim?

The theft of an asset, including a cryptoasset, does not amount to a disposal for chargeable gains purposes, because the individual or company still owns the asset in question. Victims of theft therefore cannot claim a loss under the chargeable gains rules.

HMRC notes that persons who contract to acquire tokens and do actually receive the tokens may be able to make a negligible value claim where the tokens subsequently become worthless. However, if the tokens were worthless when first acquired, a negligible value claim will not admitted, but the owner can still dispose of the tokens by other means to crystallise an allowable loss.

Scholes Chartered Accountants helps individuals and companies to prepare and submit negligible value claims.

Contact us today for assistance with your crypto tax affairs, or visit our Edinburgh or Kirkwall offices.

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