Accounting for gains and losses is important to all of those affected and wanted to share a quick FAQ article with the community based upon interactions with clients over the past fortnight.
We have divided the article up into sections based upon personas:
| Scenario | Implications | Documents required | Tools required |
| Self-assessment | Realised losses claim on tax return | Evidence on the blockchain of the loss in case of audit | CSV downloads or crypto accounting tools |
| Ltd company | Realised or unrealised losses on the balance sheet | Detailed records of losses are not used more than once | CSV downloads or crypto accounting tools |
| Crypto native project | Impact on treasury and partners | Cash-flow forecasts and financial planning. Speak to clients and partners to check on their cash position | Excel forecasts or cloud tools such as Xero |
SELF ASSESSMENTS (UK SPECIFIC)
Scenario analysis of individuals who will complete self-assessments:
| Scenario | Options? | How? |
| Sold tokens since May 7 2022 and before 2023 | Offset the tax loss in this current tax year and carry it back to previous tax years | Demonstrate sale via blockchain by providing wallet address on relevant blockchain |
| Couldn’t sell tokens due to illiquidity | Negligible value claim (where an asset becomes worthless) to offset tax return | Work out the value of the claim and enter into the box on the tax return |
| Earned interest on Anchor protocol | Interest income is subject to income tax | Calculate all interest from Anchor and enter into the miscellaneous income box on the tax return |
| Earned interest via staking, centralised exchanges, liquidity pools | Interest income is subject to income tax | Calculate all interest from exchanges and enter into the miscellaneous income box on the tax return |
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 back to the previous tax 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) to claim.
If you are struggling to sell your tokens then another option is to swap, as a swap is viewed as 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:
| Scenario | Options? | How? |
| Sold tokens since May 7 2022 and before 2023 | Realised losses on the accounts of the entity | Prepare the financial statements and ensure you make a note of the loss |
| Held onto tokens/could not sell tokens due to liquidity | Unrealised losses on the accounts of the entity | Prepare the financial statements and ensure you have a detailed reconciliation of all losses |
| Stored profits in UST | Discuss knock on effect in-house | Speak to financial, operation and senior team to ensure ongoing treasury management is robust |
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 offset?
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 in-house finance team to discuss the potential further repercussions on the business and cash flow. 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 aware of the risks.
Our key takeaways are:
- Consider your treasury management and the risk appetite of the business.
- Continuously monitor positions to ensure the risk appetite is being followed.
- 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.
If you would like any further information or help please contact Raz.
