Crypto scams are an unfortunately common occurrence. Whether it’s phishing, rug pulls or giveaway scams – billions of dollars are lost every year to crypto scams. If you’ve been unlucky enough to have lost money to a crypto scam – you might be wondering what this means for your tax bill. We’re looking at everything you need to know about tax and crypto scams, including whether you can claim your lost coins as a capital loss and offset it against your gains.
What is a crypto scam?
Crypto scams come in all shapes and sizes – so it’s important to know what to look out for. The most common types of crypto scams include:
Phishing scams aren’t exclusive to the crypto market, they existed long before. This is where a fraudster pretends to be another entity – like a crypto exchange – in order to gain access to private keys to access the victim’s crypto wallet funds.
Meanwhile giveaway scams work in a similar vein. Scammers offer lucrative ‘once in a lifetime’ type deals, promising immediate returns like an airdrop in order to get crypto investors to hand over their coins.
Rug pulls are a newer crypto scam and have become particularly frequent in the DeFi space. In a DeFi rug pull, a scammer sets up a DeFi protocol – often with unrealistic yield returns – and then quickly abandons the project and makes off with all the funds investors added. This can also happen in the centralized crypto market – where scammers create new coins promising incredible growth that never materializes while they make off with investor’s funds.
Of course, it goes without saying you should always be wary of any new, unestablished crypto coins, platforms or projects and never give out your private keys. But many of these scams look legit – especially in an unregulated market. In the first quarter of 2021 alone, US investors reported a staggering $52 million in losses from crypto scams to the Federal Trade Commission.
All this to say, if you’ve been unlucky enough to fall foul of a crypto scam – you’re not alone. You might even think you can write it off as a capital loss to benefit your tax bill for a small silver lining. But it’s not quite so simple when it comes to crypto scams and tax.
Will I pay tax on coins lost in a crypto scam?
Let’s start with the good news – you won’t pay any tax on coins or tokens you lose due to a crypto scam.
For some broader context to this – crypto is generally seen as a capital asset by tax offices around the world, which makes it subject to Capital Gains Tax. That means when you dispose of crypto by selling it, trading it, spending it or gifting it (in most countries) – you’ll pay Capital Gains Tax.
But you’ll only pay Capital Gains Tax on any capital gain you make as a result of disposing of your crypto asset. A capital gain or loss is the difference in value between when you bought your asset and disposed of it. If you have a profit, you have a capital gain and you’ll pay Capital Gains Tax on that profit. Meanwhile, if you have a loss, you have a capital loss and you won’t pay Capital Gains Tax.
Nobody wants to have a loss from their crypto – but with a volatile market it happens frequently. In fact, capital losses can actually come in handy because in many instances you can offset your capital losses against your capital gains to reduce your overall tax bill for the financial year. Some people intentionally create capital losses to do this – this is what’s known as crypto tax loss harvesting.
Can I claim crypto lost in a scam as a capital loss?
If capital losses aren’t all bad news, you’re probably wondering whether you can claim crypto you’ve lost due to a scam as a capital loss and reduce your overall tax bill?
Unfortunately, there isn’t a straightforward answer to this. It all depends on where you live and the specific rules your tax office has. In some countries – like the US – you can’t claim a capital loss from a crypto scam. Meanwhile in other countries – like Australia – you can claim a capital loss from a crypto scam.
Even if you can’t claim your crypto as a capital loss – you can write it off as no realized gain or loss. The funds are simply gone and you recognized no profit or loss from them. So you still won’t pay tax on crypto lost in a scam wherever you live, but whether or not you can claim it as a capital loss to offset against gains all depends on where you live. Let’s take a look at some of the different tax offices around the world and whether they allow you to claim crypto scams as a capital loss.
IRS Crypto Scams
The IRS is pretty clear on their stance on crypto capital losses. They state that theft losses of crypto cannot be claimed as a capital loss.
Prior to 2017, you could claim theft losses of crypto as a capital loss – so if you were involved in a crypto scam prior to this date, you could have claimed a theft loss of crypto as a capital loss. However, the Tax Cuts and Jobs Act of 2017 changed all this. Now casualty and theft losses of crypto are no longer capital losses and therefore no longer tax deductible.
HMRC Crypto Scams
HMRC has clear guidance on crypto capital losses, including stolen crypto through scams. HMRC does not view theft as a type of disposal – like a sale or trade. For this reason, you cannot claim it as a capital loss to offset against your capital gains.
However, you can make a negligible value claim for your crypto. HMRC assesses these on a case by case basis. If your negligible value claim is successful, you can later claim stolen crypto as a capital loss.
ATO Crypto Scams
The ATO has guidance for crypto scams and stolen crypto. You can claim stolen crypto as a capital loss to offset against your capital gains.
But there’s a caveat to this – you’ll need plenty of proof that your crypto was stolen due to a scam. This includes:
CRA Crypto Scams
The CRA does not have specific guidance on crypto scams and whether you can claim stolen crypto as a capital loss.
However, the CRA does allow other capital assets that are stolen to be claimed as a capital loss – so there is a good chance they may allow the same rules for crypto.
Because Canada uses the adjusted cost basis method – you’ll only ever be able to claim your original investment as a capital loss, not any unrealized gains. So for example, if you bought ETH at $1,000 and lost it due to a crypto scam when ETH was worth $4,000, you’d only be able to claim $1,000 as a capital loss to offset against your capital gains.
How can Koinly help with stolen crypto tax?
Regardless of how your tax office views crypto scams, Koinly can help simplify reporting your crypto taxes.
You can tag any crypto lost to a scam as lost in Koinly. This tag means Koinly won’t generate any gains or losses from this transaction.
When you later generate your crypto tax report – your lost crypto will have its own report section, so it’s easy to identify the transaction and file it with your tax office accordingly. You’ll also have a more detailed breakdown of the transaction with dates, cost basis and more in the report should you need proof to hand over to your tax authority.
Koinly makes crypto tax simple. Sign up free today.
This content was originally published here.