Tax loss harvesting is a legal strategy that can save you money, but there are key dates & rules you must know. Learn about tax loss harvesting in the UK. 🇬🇧
What is tax loss harvesting?
Sometimes called tax loss selling, tax loss harvesting is a tax reduction strategy. It involves selling capital assets like shares, crypto, and non-residential properties at a loss, in order to offset that loss against taxable gains.
HMRC is clear that allowable losses may be offset against gains above the tax-free allowance to reduce your total taxable gains, but there are some key rules you need to follow.
HMRC allowable losses
First, you need to consider your tax free allowance. Every taxpayer in the UK gets a £6,000 Capital Gains Tax free allowance (which is being reduced by half next tax year). You only need to offset losses against taxable gains over your tax free allowance.
As well as this, your reported losses need to be utilised at the first opportunity. That means, if you report a loss, and you have gains over your tax free allowance, you'll offset losses against these gains.
If you do not have a total taxable gain above the tax free allowance, you can carry your losses forward to offset against taxable gains in the future.
You don't have to report losses immediately, but in order to carry them forward as allowable losses in the future - you'll need to claim your losses by reporting them within 4 years (after the end of the tax year in which you disposed of the asset). You can do this using your self-assessment, or by writing to HMRC.
You cannot claim losses on assets you give or sell to your spouse or civil partner, nor other family members or connected people - unless you are offsetting a gain from the same person.
How tax loss harvesting works
It’s easiest to understand tax loss harvesting with an example.
Let’s say you bought Ethereum at £500 and Bitcoin at £26,000. Since you bought your crypto, the price of Bitcoin has fallen to £24,000 and the price of Ethereum has gone up to £2,000.
You want to cash out your Ethereum gains, so you sell for £2,000. You have gains from other investments that put you over your £6,000 tax free allowance - so your £1,500 gain from ETH is taxable.
With tax loss harvesting, you could sell your BTC for £24,000, giving you a £2,000 loss to offset against your £1,500 taxable gain - meaning you’d pay no tax at all, and have an additional £500 allowable loss to carry forward.
If you’re now wondering why you wouldn’t just buy back the asset you realised a loss on - there’s a good reason. The HMRC has specific rules to stop UK investors from doing this.
HMRC & bed and breakfasting transactions
When an investor sells an asset at a loss and repurchases the same (or a substantially similar) asset back in a short period of time, this is known as a bed and breakfast transaction as part of HMRC guidance. It’s also known as a wash sale or paper loss.
HMRC is aware investors do this in order to create a tax benefit - and as such has a Targeted Anti-Avoidance Rule to stop this. It’s all included as part of the cost basis calculation - known as share pooling. For paper losses, there are two rules you need to know:
- The same-day rule: This says if you sell and buy the same asset on the same day, you'll use the cost basis on that day to calculate your gain or loss.
- The bed and breakfasting rule: If you sell and then buy the same asset within 30 days, you'll use the cost basis of the asset that month to calculate your gain or loss.
As such, it means investors effectively cannot create artificial losses thanks to these rules.
What are the important tax loss harvesting dates?
In order to optimise your tax position, you need to do it ahead of the end of the financial year. In the UK the financial year runs from the 6th of April each year to the 5th of April the next year. That means you need to make any moves to optimise your tax position before the 5th of April each year. Any transactions after this date will count towards the next financial year.
This is especially important for UK investors as the tax free allowance is changing. Last year (2021 - 2022), it was £12,300. This financial year (2022-2023) the tax free allowance is £6000. Next year (2023 - 2024), the tax free allowance is £3,000. So make the most of tax free gains while you can.
You then have until the 31st of January each year to file.
How to tax loss harvest crypto with Koinly
No clue where to start with tax loss harvesting crypto? A portfolio tracker like Koinly can help. Here’s how it works.
You need to know your overall tax liability for the year before you can figure out whether you need to tax loss harvesting. Koinly can help you track your realised gains and losses, as well as your unrealised gains and losses throughout the year. Just connect your wallets and exchanges, and Koinly will calculate everything for you. You can see all of this in your tax summary, free of charge.
So in our example, you can see we have a gain of £945 for the year. For this example, we’ll assume we’ve already used up our £6,000 tax free allowance, but we don’t want to pay tax on the £945 over the allowance. Now we can go over to our portfolio to check out the performance of our holdings.
We can see that our AXS tokens are significantly underperforming. We can see in detail how much we bought our AXS tokens for, how much value they’ve lost, the current market price, and more.
So we’ll sell our AXS tokens ahead of the end of the financial year in order to realise our loss. You can see the transaction, and the £1,078.73 loss generated, in Koinly.
Now when we go back to our tax summary, we’ll be able to see that our gain has been reduced, to an overall £133.74 loss, meaning we’ll have no tax to pay, and we can either sell more assets and realise more gains, or carry that loss forward.
When the time comes to file, all we need to do is upgrade to a paid Koinly plan and download our crypto tax report to file our self-assessment online or hand the report over to an accountant.
More questions on tax loss harvesting? We got you covered.
What are the benefits of tax loss harvesting?
The obvious benefit of tax loss harvesting is reducing your tax bill! However, it can also be a great way to weed out poor investments and encourage you to reinvest in more profitable projects.
What are the risks of tax loss harvesting?
The most obvious risk of tax loss harvesting is that you risk selling assets too soon and missing out on gains. As well as this, if you fail to follow the same-day and 30-day pooling rules, you may not be able to offset losses. Learn more about UK cost basis calculation.
Is tax loss harvesting legal in the UK?
Yes. Tax loss harvesting is a legal tax reduction strategy, but you need to ensure you follow the allowable loss rules, including avoiding bed and breakfast transactions.
Can I offset my capital losses against ordinary income?
No. HMRC guidance is clear that allowable losses may only be offset against total taxable gains.
The information on this website is for general information only. It should not be taken as constituting professional advice from Koinly. Koinly is not a financial adviser or registered tax agent. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. Koinly is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.