A record $1.9 billion has been stolen in crypto hacks so far in 2022 according to the most recent figures. So if you've lost crypto, you're not the only one. Due to the unregulated and often immutable nature of crypto, there's often not much you can do to recoup your loss - but at least there might be a small silver lining in your tax bill if you're a Canadian investor. Learn everything you need to know in our CRA lost crypto guide.
Is lost crypto a capital loss?
Let's start with the obvious - the CRA has minimal guidance on crypto tax. As such, there is no specific guidance on whether lost or stolen crypto could be considered a capital loss.
This said, the CRA does let taxpayers deduct capital losses in the instance of theft for other capital property. As crypto is a capital property under the current guidance, it would be reasonable to conclude that you may be able to claim a capital loss for lost or stolen crypto, the same as you could for other kinds of capital property like stocks or business equipment.
A caveat though - you'll likely need lots of proof to show you have no chance of recovering your crypto, including receipts proving cost basis, the wallet address, and more.
This also means if there's a chance your exchange may refund you as they were liable for the hack, or if you still hold your crypto but it's lost all it's value, like in a rug pull, then you're unlikely to be able to claim a capital loss with the CRA.
Adjusted Cost Basis
If your crypto is considered a capital loss, there's another thing you need to be aware of - the adjusted cost basis method.
The adjusted cost basis method is the only allowable cost basis method for Canadian investors. Simply put, your adjusted cost base is however much your crypto cost you to buy or otherwise acquire, plus any reasonable expenses incurred to acquire it, like gas fees or trading fees.
Why does this matter for capital losses?
Because when you claim a capital loss due to theft or loss, you aren't going to be claiming for the current fair market value of your crypto - you're claiming for the amount you actually lost, so your original investment amount.
For example, let's say you were very clever and bought Bitcoin back in 2017 for $900. You then forgot about it entirely for a couple of years and now you've realized in 2022 that your 1 BTC is worth $40,000! But you've also lost your private keys and have no means of finding or restoring them. You may be able to claim this as a capital loss (with enough proof) with the CRA - but you'll only be able to claim $900 as your capital loss, not $40,000.
What about if you lost your crypto in a rug pull?
We mentioned this above, but when your crypto plummets in value to the point it is essentially worthless - due to a rug pull for example - then you won't be able to claim this as a theft and capital loss with the CRA. You still hold the tokens, although worthless.
In these instances, you need to realize your loss in order to be able to offset it. You can do this by:
- Selling your tokens on an exchange if possible.
- If your tokens have been delisted, you may be able to use a native or non-custodial wallet to swap your tokens for another.
- If this isn't possible, you can gift your tokens in order to dispose of them and realize a loss.
In the rare instances where a blockchain is halted and transactions are no longer possible, you may be able to claim a loss with the CRA... eventually.
Halted transactions and capital losses
Celsius, Voyager, Terra and more... there are many victims to the latest bear market. And in many of these instances, companies, or even blockchains have entirely halted transactions meaning you cannot do anything to realize your losses.
For example, Celsius investors are now unable to withdraw their assets from the platform since the company filed for Chapter 11 bankruptcy. Investors therefore cannot realize a capital loss. This is because there is still currently the potential hope of a refund or partial refund.
Unfortunately in these instances, the best thing you can do wait for the proceedings to unfold - no matter how long it takes. If at the end of proceedings, investors are unable to recoup their losses, there may be the case for a potential capital loss claim if you're still unable to access your capital. And in some instances, waiting it out pays, for example, although it has been many years, it looks like the Mt. Gox refunds may finally be coming for investors in 2022.
How Koinly can help
If you've lost crypto and want to try and claim a capital loss with the CRA - Koinly can help you when it comes to tax time. All you need to do is find the relevant transaction and use the tags on the right-hand side.
When you’ve tagged any stolen crypto, you’ll be able to see this in your tax report summary under ‘Gifts, donations & lost coins'. Koinly doesn't recognize any gains on these but it doesn't deduct them as a loss either, you can then proceed to try and claim a capital loss with the CRA.