More than $3.8 billion in cryptocurrency was stolen last year, and a number of exchanges including FTX, Voyager & Celsius halted transactions due to liquidity issues. So if you've been scammed, hacked, had your assets frozen, or otherwise lost crypto... you're not the only one. Unfortunately, there's not often much you can do to recoup your losses in these instances... but from a tax perspective, there might be a small silver lining as HMRC may let you claim a capital loss - if you meet some specific requirements. Learn everything you need to know in our HMRC lost crypto guide.
Is lost crypto a capital loss?
HMRC has clear guidance on lost and stolen crypto.
Lost crypto is not considered a disposal for Capital Gains Tax purposes as the asset still exists, even if the private key is lost. So if you've lost your private key - you can't claim this as a capital loss. However, if you can prove there is no chance of you recovering your private key and gaining access to your asset again - you can make a negligible value claim. If this claim is successful, you would later be able to claim your lost crypto as a capital loss.
Similarly, for stolen crypto - HMRC doesn't view theft as a disposal so you can't claim stolen crypto as a capital loss. There are a couple of very specific exceptions to this rule. For example, if you've bought crypto off an exchange but don't actually receive your asset, this could be considered a scam and you could make a negligible value claim and later claim a capital loss.
Negligible value claims
If you're successful with a negligible value claim, HMRC will treat the tokens as being disposed of and immediately re-acquired at an amount stated in your negligible value claim.
An important note though, as your tokens are pooled as part of the UK share pooling method, your negligible value claim needs to be made in respect of the whole section 104 pool, not individual tokens.
If you want to make a negligible value claim, you can do so at the same time as reporting your loss to HMRC.
What about if I lost my crypto in a rug pull?
In some circumstances - like with a rug pull - you'll still be in possession of your asset and therefore you these kinds of events would not be considered a capital loss. However, you can realize your loss by disposing of your tokens and create a capital loss to offset against your gains this way instead. There are a few ways you can do this including:
- Selling your tokens on an exchange if possible.
- If your tokens are no longer listed on an exchange, you may be able to use a native or non-custodial wallet to swap them for another token.
- If this isn't a possibility, you can dispose of tokens by gifting them to someone (excluding your spouse as this is not a taxable event).
- Sending your tokens to a burn wallet.
- In the rare instance a blockchain is halted, you may be able to make a negligible value claim instead.
Halted transactions and capital losses
It's growly increasingly common in the latest bear market for crypto businesses to halt transactions abruptly and potentially permanently - as has been the case with Celsius, Voyager and now FTX Group including FTX, BlockFi & Liquid Exchange. An estimated 80,000 UK investors have been impacted due to the collapse of FTX Group alone.
In this instances, you would potentially be able to make a negligible value claim for a capital loss if the company goes into liquidation - but this takes time... and a lot of it.
For example, the Mt. Gox proceedings began after the exchange collapsed overnight in 2014 - and investors are only just able to apply for potential refunds.
Meanwhile, Celsius, Voyager, FTX, BlockFi & Liquid Exchange investors are unable to access their assets as the various companies go through bankruptcy proceedings. At this point in time, investors therefore cannot realise a capital loss and due to the potential for a refund, they're also unlikely to be able to make a negligible value claim in the meantime.
Unfortunately in these instances, the best thing you can do is sit and wait out the proceedings.
How Koinly can help
If you've lost crypto and want to make a negligible value claim and eventually later claim a capital loss - 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'll need to make a negligible value claim with HMRC.