Losing crypto due to hackers, scammers and exchange shutdowns are all too common in the crypto world - but what does it mean for your taxes? Learn how to report stolen or lost crypto in a bid to claim a loss.
The crypto market is no stranger to hackers and scammers. Many investors will remember large exchange hacks in recent history like Coincheck in 2018, KuCoin in 2021 and Poly Network as recently as 2021. In fact, the FBI says that more than $1 billion was stolen from the Ethereum sector in Q1 of 2022 alone!
As well as this, many investors have lost their crypto forever. This is most commonly through misplaced private keys, sending your crypto to the wrong wallet or losing or damaging your cold storage device.
Whatever the reason, if you can’t recover your crypto, you might be wondering what this means for your taxes. Can you claim it a loss? Do you need to report it?
Most investors know that they need to declare their crypto gains and losses, as well as any income from crypto. Your crypto gains are subject to Capital Gains Tax, wherever you live.
In many countries, you can offset your net capital losses against your net capital gains. This lowers your overall tax bill, so you pay less in tax. In fact, most countries even let you carry losses forward to future tax years if you’ve already offset the maximum net capital loss you can that year.
So the big question we're tackling in this guide is - is lost or stolen crypto considered a capital loss?
It’s not a straightforward answer because it all depends on where you live.
Tax authorities around the world view this very differently. We'll look at how different countries deal with lost and stolen crypto from a tax perspective.
The IRS says that there are two different types of losses when it comes to capital gains - casualty losses and theft losses.
An example of a casualty loss would be losing access to your wallet or sending crypto to the wrong wallet. Meanwhile, a theft loss would be when your crypto is stolen from your wallet or exchange being hacked.
For casualty losses, the IRS guidance is very clear. Prior to the Tax Cuts and Jobs Act of 2017, these used to be deductible as a loss. However, since the tax reform, the only way a casualty loss could be tax deductible is if it's a federally declared disaster - which isn't likely to ever affect your crypto!
So if you've lost your private keys, sent your crypto to the wrong address or otherwise lost your crypto due to negligence, you cannot deduct this as a capital loss.
Similarly, theft losses used to be tax deductible. However, theft losses were also affected in the tax reform. They are now no longer tax deductible. So if you’ve lost your crypto due to a hack or scam, you cannot claim it as a loss and offset it against your gains. Incredibly, the IRS actually states the thief has to declare the market value of the stolen property on their tax return!
So if you lose crypto - whether that's from losing your private keys or to a scammer - you can't claim any kind of deduction for it. The best thing you can do is simply write it off and disregard it from your calculations entirely.
In 2023, the IRS released guidance clarifying its stance on for taxpayers with crypto assets worth less than $0.01 - like investors left with UST tokens. The IRS says there can be no deduction for losses on holdings which have dropped to less than one cent. Even if the asset appears "worthless or abandoned", it has not been sold and therefore there is no disposal and no loss.
The HMRC has clear guidance on both lost and stolen crypto.
For lost crypto, the HMRC doesn't view this as a disposal for Capital Gains Tax purposes. They state the private key and asset still exist, so they cannot consider it a disposal and therefore subject to Capital Gains Tax. In other words, if you've misplaced your private key, you're out of luck and you can't claim this as a capital loss.
This said, if you can prove there is zero chance of you recovering your private key and accessing your asset again, you can make a negligible value claim. If your negligible value claim is successful, you'll later be able to claim your crypto as a capital loss.
When it comes to stolen crypto, the HMRC doesn't consider theft to be a kind of disposal. Because of this view, you wouldn't be able to claim stolen crypto as a capital loss.
However, there are specific exceptions to this rule. If you're contracted to acquire crypto - for example, you've bought them off an exchange - but don't actually receive what you've paid for, you might be able to claim this as a capital loss.
Similarly, if you're contracted to acquire crypto and do receive them, you might be able to claim a capital loss if those tokens become worthless later on. To claim either of these events as a capital loss, you'd need to make a negligible value claim like above.
You can learn more about how to make a negligible value claim and when our HMRC lost crypto tax guide.
The ATO has clear guidance on reporting lost or stolen crypto on your tax report. It's good news for Australian investors as the ATO are a lot more sympathetic than many other tax offices!
You can claim lost or stolen crypto as a capital loss in Australia - provided you've got the right evidence to back it up.
You'll need the following evidence to prove you've lost your crypto for good:
You can learn more about how to claim a capital loss due to lost or stolen crypto in our ATO lost crypto tax guide.
The CRA is a bit behind the curve when it comes to clarity on crypto tax laws. They’re yet to give any specific guidance on whether lost or stolen crypto could be reported as a capital loss.
This said, the CRA does allow taxpayers to deduct capital losses due to theft for other assets - so there is a chance that they would apply the same rules to cryptocurrency.
Because Canada uses the adjusted cost basis method, it is likely that you would only be able to claim your original investment as a loss, not any perceived profits. So for example, if you bought 1 BTC years ago for $700, but lost it this year with a fair market value of $40,000, you’d only be able to claim $700 as a loss - if at all.
Even with this precedent, you should speak to an experienced accountant before trying to claim lost or stolen crypto as a capital loss on your tax return.
Koinly lets you tag any lost or stolen crypto. All you need to do is find the relevant transaction and use the tags on the right hand side.
When you’ve tagged any lost or stolen crypto, you’ll be able to clearly see this in your tax report summary under ‘Gifts, donations & lost coins'.
Koinly doesn't recognize any gains on these transactions, but it doesn't deduct them as a loss either. You'll need to make a claim with your relevant tax authority to do this. Our crypto tax calculator can help you collect evidence to do this with records of your transactions, gains and losses.