Are Crypto Losses Tax Deductible in Canada?
Learn about crypto losses and whether they're tax deductible in Canada, as well as how to realize and claim crypto losses on taxes in Canada.
Crypto losses are tax deductible in Canada, but you need to realize your loss first by disposing of your asset.
In some instances, like losses due to theft or defunct exchanges, this may be more difficult.
The CRA does allow losses to be deducted due to theft for other capital property, but there's no guidance on crypto.
You can claim losses at the point you submit your annual tax return.
Are crypto losses tax deductible?
Yes. Crypto losses are tax deductible in Canada. This means you can offset any capital losses from crypto investments against capital gains. You can offset crypto losses against any other gains of a similar kind, whether that's crypto or another capital investment like stocks.
How to claim crypto losses on taxes Canada
Provided your loss is realized, to claim crypto losses on taxes in Canada, you just need to report them in your annual tax return, using the Schedule 3 form. This form determines your taxable capital gains or net capital loss.
You'll report your total capital gains and losses, but it's worth noting, for individual investors, that only half of any capital loss can be offset; the same as only half of any capital gain is taxable.
If you have an unrealized loss due to a more complicated circumstance, the way to realize and claim your loss varies depending on whether you can dispose of your asset or not.
Is loss due to theft a capital loss?
There is no specific guidance from the CRA on whether lost or stolen crypto could be considered a capital loss. However, the CRA lets taxpayers deduct capital losses in the instance of theft of 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 need plenty of proof to show you have no chance of recovering your crypto, including receipts proving cost basis, the wallet address, and more.
You'll also need to consider whether there's any chance of a refund or reimbursement, or whether your crypto is of negligible value, as in these instances it's unlikely you'd be able to claim a capital loss with the CRA.
You should speak to a crypto tax accountant in Canada for specific advice.
How to realize crypto losses from theft
The answer to this question depends on how you've lost your crypto, so we'll cover some common scenarios:
Exchange hacks: In this instance, you're not the custodian of your crypto. Legitimate and secure exchanges should have a number of measures in place, including insurance policies for consumer assets held in hot and cold storage, to repay any investors affected by a hack on their platform due to a security breach on their end. Your first port of call, if you've lost crypto due to an exchange hack, should be the exchange itself to see if any funds will be reimbursed to affected users before attempting to claim a loss.
Exchange collapse: Similarly to above, as you're not the custodian of your crypto, you'll need to wait it out to see if your funds are reimbursed before you can claim a loss with the CRA.
Wallet hacks: In these instances, there's not much you can do to recover your crypto, unfortunately. But the CRA may let you claim a loss with enough proof.
Lost private keys: Many wallets now require seed phrases while setting up, so provided you followed the instructions to store your seed phrase safely in case of emergency, you may be able to use your seed phrase to gain access to your wallet again. If you're unable to do so, again, there isn't much else you can do to recover your crypto, but the CRA may let you claim a loss with enough evidence.
DeFi hacks: Unlike with centralized exchanges, because you interact with DeFi protocols using non-custodial wallets, even if there's a security breach on their end, it's unlikely anyone is going to be reimbursing you for your losses, although in some instances, larger crypto businesses have stepped in to help reimburse customers. Although it's unlikely you'll be able to recover your crypto, provided you can prove it's a permanent loss (and not that your tokens are of negligible value), then you may be able to claim a capital loss.
Rug pulls: Whether it's a rug pull or another kind of scam where you end up with tokens of negligible value (i.e. $0), your best bet in these instances is to realize your loss in order to claim it. This means disposing of your tokens by whatever means available to you, whether that's by selling or trading them if possible, or gifting them or sending them to a burn wallet if liquidity is too low for more common disposals. Once you've disposed of your tokens, you can claim your loss.
Theft losses and adjusted cost basis
When you claim a capital loss due to theft or loss, 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 how much your crypto cost to purchase, or otherwise acquire, plus any reasonable expenses incurred to acquire it, like gas fees or trading fees.
This matters for capital losses because when you claim a capital loss due to theft or loss, you aren't claiming for the current fair market value of your crypto; you're claiming for the amount you lost, so your original investment amount.
Example
You bought 1 Bitcoin years ago for $900 and then forgot about it. Now you've realized that your 1 BTC is now worth $100,000!
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 evidence) with the CRA, but you'd only be able to claim $900 as your capital loss, not $100,000.
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, so you can then proceed to try and claim a capital loss with the CRA.
