Why losses locked in the VDA bucket can't soften other income - clear answers from real cases
5 Practical Questions I’ll Answer About Loss Ring-Fencing and VDA Buckets
Tax rules split losses into labeled pools. One of those pools is commonly called the "VDA bucket" in practice notes and guidance. People who run businesses, manage investments, or advise clients ask the same blunt questions: can I use those losses to reduce salary or other income? What are the limits on moving losses between heads? When should I accept the bucket or fight for reclassification? These questions matter because a misread can cost tens or hundreds of thousands of dollars in tax and penalties, or close a business's cash window when it needed relief.
What exactly is a VDA bucket and how does loss ring-fencing work? Can I move VDA losses to offset different types of income? How do I actually use VDA losses so they provide the most benefit? Should I hire a tax attorney or handle this myself? What law changes are coming that will affect these buckets and the cross-head adjustment ban?
What exactly is a VDA bucket and how does loss ring-fencing work?
Think of a VDA bucket as a labeled container on your tax return. The tax system often requires you to track losses by activity or "head" - trading loss, property loss, capital loss, and so on. A VDA bucket is one of those special containers. Loss ring-fencing means the legislator has put a fence around that container: losses inside it can only be used against income of the same type, or according to a narrow set of statutory rules. They do not collapse into a general pool you can dip into for any income.
Why legislators do this: to stop loss trafficking, where taxpayers intentionally route losses through one activity to offset unrelated income, creating arbitrage. The fence makes treatment predictable but blunt.
Concrete example: The coffee roaster
Sam runs a coffee roasting side business and also works a full-time job. In year 1 his roasting operation loses $40,000 because a key machine failed early and overheads were high. The tax system puts those losses in the trading/VDA bucket for small businesses. Sam assumes he can use the $40,000 against his $90,000 salary to get a large refund. The rules say no - trading losses in that bucket can generally only be offset against trading income, not employment income. Sam can carry the $40,000 forward to reduce future roasting freelancer crypto tax profits, or, in some jurisdictions, elect limited relief like terminal loss within narrow windows, but he cannot soften his salary.

Can I move VDA losses to offset different types of income?
Short answer: usually not. Most systems enforce a cross-head adjustment ban. That means losses defined under one head cannot be shifted to another head unless the statute spells out a route. There are exceptions, but they are specific.
Common exceptions you might see
Statutory carry-back provisions that allow losses to be applied to prior years' profits within defined periods. Group relief, where trading losses can be surrendered to a group company in the same consolidated group subject to conditions. Capital loss rules, which allow offset only against capital gains. Targeted reliefs for particular industries, such as terminal loss relief for oil exploration or initial-year start-up reliefs.
These exceptions are narrow and procedural. If you try to creatively re-label income or re-categorize an activity with the aim of freeing losses to offset other income, auditors will scrutinize substance over form. Courts often reject arrangements where the economic reality shows the loss was always meant to be used against unrelated income.
Real scenario: Maria and the R&D write-off
Maria runs a consulting firm and invests heavily in in-house software development. The development losses hit the R&D/VDA bucket. She hoped to sweep those losses against dividends she receives from the firm, reducing her personal tax bill. The tax authority refused: the R&D bucket losses could only be used under the R&D loss relief rules — carry forward to future R&D-related profits or, in limited cases, surrender to group companies. The attempt to cross-sweep against dividends was blocked by the cross-head adjustment ban.
How do I actually use VDA losses so they provide the most benefit?
The practical approach is to accept the fence and work within it. That sounds defeatist, but structured correctly it can yield relief and reduce cash strain.
Identify how the loss is classified. Get a formal position in writing from your accountant. Many later disputes start with ambiguous classification. Check statutory pathways. Can you carry back? Is there group relief? Is there industry-specific terminal loss relief? Each of these routes has eligibility tests and deadlines. Consider timing. A carry-back election might give immediate cash by amending a prior year return. A carry-forward helps if you expect profits in the same activity soon. Document everything that shows the activity’s substance - invoices, contracts, board minutes. If the loss is legitimate and falls squarely within the bucket, you get cleaner relief sooner. If you have related parties, consider intra-group restructures only after advice. Group relief can convert an unusable loss into a group-wide benefit.
Worked numbers: Acme Engineering
Acme Engineering has a VDA-locked loss of $120,000 in 2024. Acme expects trading profits in 2025 of $200,000.
Scenario A - carry forward: Acme offsets the $120,000 in 2025 trading profits, reducing 2025 taxable profits to $80,000. Scenario B - carry back (if allowed for this VDA loss): Acme carries back $120,000 to 2023 profits, triggering a refund of tax paid in 2023 and improving liquidity in 2024.
Both are valid but deliver different cash timing. Choosing requires knowing the specific rules for VDA losses in your jurisdiction.
Should I hire a tax attorney or handle IRS (or tax authority) negotiations myself?
Short answer: it depends on scale and complexity. If the numbers are small, competent accounting advice paired with a clear knowledge of the loss rules will often suffice. Hire counsel in these situations:
The assessment or adjustment is large and threatens solvency. There are cross-border elements - transfer pricing, foreign tax credits, or residency complications. You face a formal audit or litigation over loss classification. You plan a corporate restructure to move losses - that can trigger anti-avoidance rules.
Case: Family oil business
A family-owned oil company had VDA-labeled depletion losses after a dry well. The tax authority refused surrender to the group and challenged the firm's allocation of costs. The owner sought an experienced tax attorney. Through negotiation, re-analysis of contracts, and selective litigation, they recovered $480,000 in relief and avoided a forced capital gains event. The legal fees were substantial but justified given the stakes.
One practical tip: if you hire counsel, bring organized financial statements, contracts, project schedules, and any prior tax rulings. That cuts time and fees and lets counsel focus on strategy rather than document collection.
What tax law changes are coming in 2026 that affect VDA buckets and the cross-head adjustment ban?
Tax reform cycles often target loss reliefs because they can be abused at scale. Here are plausible changes to watch, and how they could affect you.
Stricter anti-avoidance on loss transfers - tighter tests to deny relief if transactions lack commercial substance. Limits on group relief, such as time-based windows for surrendering losses or tightened ownership tests. Expanded ring-fencing for particular high-risk industries like digital services or resource extraction. Increased disclosure requirements for large losses and mandatory pre-clearance for some loss relief elections.
None of these are certain. Still, planning should assume governments will reduce opportunities to shift losses freely, and might introduce reporting that makes aggressive planning visible early.
Thought experiment: What if the fence becomes a wall?
Imagine a change that makes VDA buckets permanently locked to the originating activity with no group or carry-back relief. What do you do?
Shift business model: move toward activities that generate profits in the same head as the losses so they can be absorbed. Asset sales: sometimes selling the loss-making activity at arm's length crystalizes tax positions and creates capital losses that have different offset rules. Capital injection vs restructure: weigh the value of leaving the loss in place versus using an M&A route to monetize it within the limits of anti-avoidance rules.
These moves are strategic and need careful tax, commercial, and legal review. The experiment shows why early diagnosis matters - a wall is harder to work around than a fence.

Quick Win: Do this in the next 30 days
If you're reading this because you just discovered a VDA loss on your accounts, take three simple actions now. They cost little and can preserve options.
Get a clear classification in writing from your accountant showing the statutory basis for the VDA label and the relevant code sections or guidance. Check deadlines for carry-back elections and group relief surrender - some are tight and irrevocable. Run a two-year forecast for the specific activity: if you expect profits soon, carry-forward relief might be perfectly adequate; if not, consider filing an amended prior-year return to carry back if permitted.
These steps reduce the chance of missing procedural relief and give you time to consider larger structural options with proper advice.
Final examples that sharpen the rule
Example 1 - The consultancy and the capital loss
A consultancy sells a division at a loss that falls in the capital loss bucket. The owner wanted to offset that capital loss against retained trading income from his active consultancy. Capital losses can only go against capital gains. The owner tried to reclassify the loss as a trading loss in an aggressive reallocation of goodwill. The tax authority rejected it. The cost of the dispute exceeded any prospective tax benefit.
Example 2 - The group surrender that worked
A retailer in a group had VDA trading losses while a sister company had big profits. By surrendering the losses under the group relief rules and following the documentation and ownership tests precisely, the group avoided paying tax on the sister company's profits and preserved cash. The relief was straightforward because the rules expressly allowed intra-group surrender for that loss head.
Where to go from here
Loss ring-fencing and VDA buckets can be frustrating because they block immediate relief you expect. The practical path is assessment, documentation, and picking the statutory route that applies. When stakes are high, bring in a specialist early. If the loss is modest, implement the quick wins and monitor upcoming legislative changes. Finally, treat the bucket not as a trap but as a predictable allocation - use its rules to plan rather than try to outmaneuver them.