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. Some of 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 2022 alone, the FBI says that cyber criminals stole $1.3 billion in cryptocurrencies, with 97% of this stolen from DeFi platforms.
Dusting attacks aren't new - but they are increasing in popularity, so they're well worth a mention so you can avoid them. When it comes to crypto - dust refers to a tiny amount of coins or tokens left in a wallet, that is so small it cannot be transferred as it does not cover the transfer fee. For example, a couple of hundred Satoshis would be considered dust. Most users don't pay any attention to dust in their wallets, and malicious actors have taken advantage of this with what's known as a dusting attack. A dusting attack involves a scammer sending dust to a number of different wallet addresses. The scammer then uses this information to figure out which addresses belong to the same crypto wallet - with the end goal being able to link dusted addresses and wallets to specific individuals or companies. If the scammer is successful, they'll then target these individuals or companies with phishing attacks or extortion threats.
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.
Watch: How to avoid crypto scams
Will I pay tax on coins lost in a crypto scam?
Fortunately, losing your crypto due to theft won’t be seen as a disposal, meaning you won’t be expected to pay capital gains tax on any ‘gains’ - meaning a difference in value from the day that your coins were sold, and the day they were bought. This sounds like an obvious and fair approach, but as crypto investors know, the IRS doesn't often miss out on a chance to apply tax to crypto!
Of course, victims of crypto hacks have lost their assets entirely - so the bigger question is, can they claim a capital loss? A capital loss could be used to offset a capital gain, which is the go-to tax strategy for any investor.
Can I claim crypto lost in a scam as a capital loss?
No. Because theft is not considered a disposal of a capital asset - it isn't subject to Capital Gains Tax. This means you can't claim it as a capital loss in many countries, including the US.
What this means for your tax bill is you simply write off stolen crypto as no realized gain or loss. The asset is simply gone and you recognized no capital gain or loss as a result.
This said, this does vary a little depending 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.
Watch: What are the tax implications of crypto scams?
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 suspended personal casualty and theft losses, excluding in areas hit by a federally declared disaster. For this reason, casualty and theft losses of crypto are no longer capital losses and therefore no longer tax deductible.
This said, many of the individual tax reforms in included in the 2017 bill are due to expire in 2025 - so in the future, theft and casualty losses may once again be able to be claimed as capital losses.
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.
There is however a glimmer of light for investors caught in the type of scam where coins bought under false pretenses become worthless. In this specific case you may be able to make a ‘negligible value’ claim.
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:
The date you received your asset and the date it was stolen.
The wallet address the private key relates to.
Proof of the costs you incurred to acquire your stolen crypto.
Proof of the amount of crypto in the relevant wallet prior to the date you had your crypto stolen.
Proof you own the wallet or proof you're in possession of the hardware that stores the wallet.
Proof of transactions made by yourself to the wallet, for example from an exchange.
The possibility of tax relief applies to crypto investors in the classic sense only. For Aussie taxpayers who own crypto as a personal use asset it’s a different story. If the ATO considers the coin a personal use asset — something kept or used mainly to purchase items for personal use or consumption — it will disregard a crypto loss.
You can learn more about how the ATO deals with crypto lost in a scam in our guide.
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.