Terra Crash at Tax Time: Do This Now to Claim Losses

Terra crash: It has been a bloodbath in the crypto market over the last week. Terra LUNA investors have taken the worst of the hit. While you won’t be able to turn back time, there are a few critical steps you can take today to improve your financial situation from a tax perspective, says Tony Dhanjal, Head of Tax at crypto tax calculator Koinly.

Just six months after a record high, the global crypto market cap has plummeted by $1.9 trillion. That is a brutal $0.6 trillion more in losses than the 2007 subprime mortgage market crisis.

No crypto has been spared, but Terra’s native coin LUNA has lost 99.9% of its value in a single week alone. This was due to their algorithmic stablecoin UST proving to be far from stable. If you’ve invested in LUNA or UST, things are looking bleak right now. But there might be a small silver lining in the form of your tax bill.  

Why did LUNA crash?

The Terra LUNA and UST crash started on Monday the 9th of May 2022 and the story isn’t over yet. So far UST and LUNA have lost more than $40 billion in value combined.

In brief, the crash was triggered by large withdrawals and sell-offs of UST. This caused a depeg and in turn, caused the value of LUNA to plummet from $86 on May 6 to $0.000215 at the time of writing. Meanwhile, UST still hasn’t managed to recover price parity and is trading at $0.15 currently.

Now, Terra investors are trying to figure out what to do in the aftermath of the crash. Here’s what you need to know.

Terra investors: What can you do?

If you’ve invested in LUNA or UST, or you know someone else who has, above all – reach out. Many investors have lost their life savings to this crash.

As well as this, there are really just two options. You can wait it out in the hope of a recovery, or you can use the loss strategically to lower your tax bill.

Wait it out

This situation is still playing out – so good news could be coming for UST investors.

Binance CEO, Zhao, has confirmed that the crypto exchange giant will protect users and ask the Terra project team to compensate retail users of UST and LUNA first. He also publicly backed a proposal asking Terra to prioritize smaller wallets to recoup losses first in the interest of fairness.

Currently, this hasn’t been confirmed by Terra, with Do Kwon’s latest update proposing a fork instead. However, this has been met with harsh criticism from investors – so this may change.

Regardless, work out your actual standing and potential losses from LUNA or UST. Then, you may be able to at least realize and offset your losses to reduce your tax bill, which may help improve your financial situation.

Tax loss harvesting

Private investors, who are not viewed as conducting a business by their tax authorities, may be able to lean on Capital Gains Tax rules for a reprieve.

Just as a capital investment can realize a gain, it too can realize a loss. And a capital loss can be used to offset gains, reducing your overall tax bill. For LUNA and UST investors, the key now is to realize a capital loss.

Terra: How to realize a capital loss

When claiming a tax deduction for a capital investment loss, the same principles apply generally for the majority of countries including the US, UK, Canada and Australia.

A loss isn’t realized from a Capital Gains Tax perspective until you dispose of your asset. So first, investors need to figure out how to do this. In other words, you need to find a way to dispose of your LUNA or UST.

Once you have a loss, you’re able to then offset that against both current and future investment gains. This is the case in most countries where Capital Gains Tax rules hold sway.

Sell your crypto

Theoretically, the easiest way to officially realize losses from LUNA or UST is to sell the asset on an exchange that is still trading those pairs to crystalize your loss. Of course, many exchanges over the last week have now delisted LUNA and UST, so this might not be an option for many investors.

Swap your crypto

An alternative is to use a native Terra wallet that lets you swap LUNA for UST (or vice versa) – like Terra Station. A swap is viewed as a disposal. So although you’ll still hold one of the tokens, this could help you realize a claimable loss on your investment.

Gift your crypto

In the UK, Australia and Canada – you could gift your LUNA or UST to another person (excluding your spouse in the UK) to realize your loss.

What if you can no longer dispose of your LUNA?

In the event that transactions on the Terra blockchain are permanently halted and you’re unable to realize your losses, it gets a little more complicated as it all depends on where you live.

There may be reasonable grounds to claim that your asset has been destroyed and its value reduced to zero. Tax offices that allow losses as a result of loss or theft like Australia and Canada would potentially allow this. Similarly, the UK’s HMRC may allow a negligible value claim in these instances.

Loss options for UK investors

First, you could aim for a capital disposal by selling, swapping or gifting your LUNA or UST and offset your loss against any other gains.

If you do this, losses need to be registered within four years of the end of the tax year in which they were realized. This means losses made in May 2022 must be registered by 5 April 2027. Once you’ve registered your losses, you may carry them forward indefinitely to offset against future gains.

Alternatively, under Sections 22–24 of the Taxation of Chargeable Gains Act 1992, HMRC guidance allows claims to be made when an asset becomes worth ‘next to nothing.’ Negligible value claims do not require the crypto asset to be sold and losses can be carried forward indefinitely.

Terra Loss options for US Investors

Unfortunately, for US investors, the news isn’t as good. You’re unable to claim casualty or theft losses as a capital loss, so you must realize your loss in order to reduce your tax bill. According to the IRS, your disposal options are to sell, swap or spend your LUNA or UST.

In the US, if you have more capital losses than capital gains, you can offset a further $3,000 in capital losses against your income for the year. You can also carry any unutilized losses forward to future tax years.

Terra Loss options for Australian investors

The ATO lists 4 ways to make a capital disposal. These are to sell, swap, gift or

use cryptocurrency to obtain goods or services. Of course, the latter of these options isn’t viable in the current market conditions as most spending protocols have suspended services.

Once you’ve been able to realize a loss, in Australia, you can then strategically offset your losses against your short-term capital gains first before offsetting your discounted long-term capital gains to ensure you pay the least tax possible.

You can also carry your unutilized losses forward to future tax years. For Australian investors in particular, you only have until the 30th of June 2022 to realize your LUNA and UST losses if you want to register and offset them for this financial year.

Alternatively, the ATO states that you may be able to realize a capital loss on worthless shares when a company is dissolved. This is if a liquidator or administrator declares in writing that there is no likelihood you will receive any further distribution in the course of winding up a company.

However, there is no clear guidance on this regarding other capital assets – like crypto. This is unchartered water for crypto investors with no precedent, so in general, realizing a loss through a disposal will be the safer route.

Terra Loss options for Canadian investors

The CRA is clear that you can dispose of crypto by selling, swapping, spending or gifting it. So LUNA and UST investors have many routes for realizing their loss.

The CRA does allow taxpayers to deduct capital losses due to theft for other assets. But they haven’t yet updated their guidance on whether this applies to crypto. In other words, you may be able to claim lost or stolen crypto as a capital loss. But in the absence of specific guidance from the CRA, realizing a loss through a disposition may be the simpler route.

Once you’ve realized your loss – because you only pay tax on half of any capital gain in Canada, similarly you may only deduct 50% of a capital loss. You may carry capital losses forward indefinitely.

About the author

Tony Dhanjal is the Head of Tax at Koinly. He is also a YouTube educator. He founded the Accounting & Tax Academy. Their mission is to deliver empowering accounting and tax content in a digestible and fun way, to help people make informed and positive decisions. Tony is on a mission to revolutionize the way accounting and tax advice and services are delivered.