Minimizing tax losses: The TerraUSD and LUNA collapse

February 9, 2023 | Anish Kamboj, Andrew Rodrigues

Throughout the year, many cryptocurrencies have collapsed. These loss events are indicators of the significant losses the cryptocurrency market has experienced this year.

For investors who have suffered losses, an important consideration is how to capitalize on these losses. Accordingly, this article will analyze the recent TerraUSD and LUNA collapse by applying the following tax strategies:

  • Deducting capital losses against capital gains; and
  • Deducting business losses against business income.

To minimize losses, cryptocurrency investors should consider these tax strategies and apply them as necessary.

TerraUSD and LUNA

A cryptocurrency event that led to significant losses was the TerraUSD (“UST”) and LUNA crash.

UST is a stablecoin, pegged to the U.S. dollar, with one UST originally claiming to hold a price around $1 USD. LUNA is the cryptocurrency token backing it. Both UST and LUNA are two tokens of the Terra network, a blockchain-based project developed by Terra Labs in South Korea.[1]

In the Terra ecosystem, users could swap the LUNA token for UST, and vice versa, at a guaranteed price of $1 USD, regardless of the current market price of either token.  During the swapping process, a percentage of LUNA was burned (permanently removed from circulation) and the remainder was deposited into a community treasury. Funds in the treasury were then used to invest in applications and services that expand the utility of the Terra ecosystem. Burning a percentage of the LUNA tokens effectively reduced the number of overall tokens left in circulation, making them more scarce, and therefore, more valuable. Minting more UST tokens had the effect of diluting the existing tokens in circulation, bringing the overall price back down to its $1 USD level.[2]

Explained simply, instead of relying on a reserve of assets to maintain their peg (as collateralized stablecoins do), UST is an algorithmic stablecoin, which uses a smart contract-based algorithm to keep the price of UST anchored to $1 USD by burning LUNA tokens in order to mint (create) new UST Tokens.[3]

If demand was low for UST and the price fell below $1 USD, UST holders could exchange their UST tokens at a ratio of 1:1 for LUNA. The exchange would cause burning of LUNA tokens and an increase in their value because of the resulting scarcity. This would allegedly allow a holder to obtain a risk-free profit.[4]

Although this mechanism was promising in theory, UST and LUNA plummeted in May 2022. UST and Luna continued to work as designed. However, the LUNA supply increased from approximately 725 million tokens to 7 trillion tokens, with LUNA losing 99.9% of its value. LUNA experienced significant hyperinflation.[5]

UST, unlike collateralized stablecoins, was not fully backed by a form of collateral. When the LUNA supply increased to 7 trillion, the LUNA foundation only had $4 billion of UST in the reserve. This could not support the increase in LUNA.[6]

The price of UST fell below $1 USD and could not return. Both the algorithm and intended protections offered by the LUNA Foundation failed to correct the price drop. Ultimately, over $40 billion was lost between UST and LUNA.[7]


For Canadians who suffered as a result of the nearly catastrophic drop in value of UST and LUNA, there are potentially two paths forward.

The first is for the user to hold their investment with the hopes that the value of their investment recovers over time. However, the likelihood of LUNA and UST recovering their value is impractical unless large amounts of LUNA are burned, with the ultimate goal of pushing the supply down from over six trillion to around 350 million, where it was sitting before the crash.[8] Therefore, a decrease in the supply of LUNA appears to be the only hope for holders to see their pre-market drop investments return to their previous state. This is possible, but unlikely.

The second path forward is for the user to cut their losses, sell their LUNA and UST, and try to offset their gains with their losses from the drop in the value of UST or LUNA below the holder’s adjusted cost base. Income from selling or otherwise disposing of cryptocurrency may be treated as business income or a capital gain, and losses may be treated as capital losses or business losses, depending on the taxpayer’s particular facts and circumstances.[9]  An understanding of these concepts is necessary to pursue this option.

Capital gain and losses

If the sale of cryptocurrency is considered capital property, then the taxpayer will realize a capital gain or capital loss on the sale of the cryptocurrency. According to the Canada Revenue Agency (the “CRA”), a capital gain exists when you sell, or are considered to have sold, a capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.[10] Likewise, a capital loss exists when you sell, or are considered to have sold, a capital property for less than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.[11]

One half of the capital loss (referred to as the allowable capital loss) may be deducted from capital gains. Capital losses may generally only be offset by capital gains, not other income. If the taxpayer does not have any capital gains against which to offset capital losses, the taxpayer can carry the net capital losses forward indefinitely, or alternatively, can carry the losses back for any of its preceding three years.[12]

These principles can apply to UST and LUNA holders. For instance, if a holder bought UST or LUNA at $50, and the value is now $0.000245 per coin, the holder’s capital loss would be $50, assuming an adjusted cost base of $50. The holder’s allowable capital loss would be $25 (i.e., one half of the capital loss), which the holder could then use to apply to their taxable capital gains in the year. Where the holder has allowable capital losses in excess of their taxable capital gains for the year, the holder may carry their net-capital losses back 3 years or forward indefinitely, but may only use them to offset taxable capital gains.[13]

Business income and losses

If the sale of cryptocurrency is considered non-capital property, then a taxpayer may realize a business income or loss on the sale of the cryptocurrency. A business loss can be used to offset business income.

The Income Tax Act (the “Act”) defines a “business” as a “profession, calling, trade or undertaking of any kind whatever” and includes an “adventure or concern in the nature of trade.”[14] In general, consistent and sustained activities undertaken with a view to profit will be labelled as a “business” activity within the meaning of the Act. However, an “adventure or concern in the nature of trade” may still be captured by an isolated transaction in which a taxpayer makes a single, speculative purchase and ultimately sells the property.[15] Under these circumstances, as long as the transaction was intended to yield a profit, the transaction would likely be considered to be in the nature of business.[16]

There is a litany of case law which discusses whether income should be characterized as received on account of business or capital; however, the following is a list of factors which the CRA considers indicative of carrying on a business:

  1. The taxpayer carries on the activity for commercial reasons and in a commercially viable way;
  2. The taxpayer undertakes activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory;
  3. The taxpayer promotes a product or service;
  4. The taxpayer’s conduct shows that they intend to make a profit, even if they are unlikely to do so in the short term; and
  5. The taxpayer is engaged in an adventure of concern in the nature of trade.[17]

While the intention to sell at a profit is relevant with regards to determining whether income is held on account of business or capital, this is not in itself determinative and must be considered alongside the other factors.[18]

It is important to note that purchasing cryptocurrency with the intent of profiting from its sale may be considered business income, irrespective of whether or not this is an isolated incident. The CRA considers the following to be examples of a cryptocurrency business: cryptocurrency mining, cryptocurrency trading, and cryptocurrency exchanges, including ATMs.[19] Where a taxpayer engages in any of the aforementioned activities, the CRA may consider the taxpayer to be carrying on a cryptocurrency business. However, in determining whether a taxpayer is carrying on a business, each situation will be assessed on a case-by-case basis.

If a LUNA or UST holder is carrying on business, then the holder’s UST or LUNA holdings may be considered business income. As previously mentioned, the consideration of whether there is an intention to profit is key, but the other factors described by the CRA should also be considered.  While the holder cannot claim any non-capital loss incurred in the current year, the holder can carry the non-capital loss back 3 years or forward 20 years to offset income from any other source (so long as it is not an allowable business investment loss, which is only a non-capital loss for 10 years).[20] However, non-capital losses from earlier years must be deducted before deducting non-capital losses in later years.[21] If you are a UST or LUNA holder carrying on business as a cryptocurrency miner, trader, exchange, or other type of cryptocurrency-related business, and you have experienced a non-capital loss from the sale of your holdings, then this may be an option for you.


The collapse of cryptocurrencies is a loss event currently prevalent in the cryptocurrency-market. Although the authors would love to assert that such events will no longer occur in the nascent-cryptocurrency-industry, such an assertion would be inaccurate. With that being said, investors should consider the strategies discussed in this article if they are subject to such collapses, or as a proactive measure in case their cryptocurrency holdings are similarly affected.

In these trying times, it is important for investors to be patient and prepared. If you need assistance with your cryptocurrency-tax concerns, please contact a member of the Miller Thomson LLP Corporate Tax team.

The authors would like to thank Raffaella Garofalo, 2022 Miller Thomson Summer Student for their contributions to this article.

[1] Krisztian Sandor, “What is LUNA and UST? A Guide to the Terra Ecosystem” (May 9, 2022), online: Coindesk .

[2] Ibid.

[3] George Kaloudis, “The Collapse of UST and LUNA Was Devastating, but There Is Still Hope for Crypto” (May 16, 2022), online: Coindesk .

[4] Sandor, supra note 1.

[5] Kaloudis, supra note 3.

[6] Ibid.

[7] Ibid.

[8] Michael Abetz, “Will LUNA Recover – Can It? What Happened Wasn’t Like a Crypto Dip” (August 25, 2022), online: Business 2 Community .

[9] Canada Revenue Agency, “Guide for cryptocurrency users and tax professionals” (June 26, 2021), online: [Cryptocurrency Guide].

[10] Canada Revenue Agency, “T4037 Capital Gains 2021” at “Definitions” (January 18, 2022), online: .

[11] Ibid at “Definitions.”

[12] Cryptocurrency Guide, supra note 9.

[13]  Income Tax Act, RSC, 1985 c.1 (5th Supp.), paragraph 111(1)(b) [Act].

[14] Ibid, subsection 248(1).

[15] Jinyan Li et al., “Principles of Canadian Income Tax Law,” 9th Edition, (Thomson Reuters: Toronto, 2020), citing: MNR v Taylor, [1956] CTC 189, 56 DTC 1125 (Can Ex Ct) [Taylor] and Regal Heights v MNR, [1960] CTC 384, 60 DTC 1270 (SCC).

[16] Ibid.

[17] Cryptocurrency Guide, supra note 9.

[18] Taylor, supra note 15 at para 54; See also Canada Revenue Agency, Interpretation Bulletin IT-459, “Adventure or Concern in the Nature of Trade,” (September 8, 1980), online: at para 12.

[19] Ibid.

[20] Act, supra note 13, paragraph 111(1)(a); See also Canada Revenue Agency, “Income Tax Audit Manual” (July 2020), online: at para 29.1.0.

[21] Act, supra note 13, paragraph 111(3)(b).


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