Losing crypto due to hackers, scammers, and exchange shutdowns is 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, Chainanalysis estimates more than $3.8 billion of crypto was lost last year 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 as a loss? Do you need to report it?
Can you claim stolen or lost crypto as a capital loss?
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. For this guide, we'll be focusing on lost and stolen crypto for US investors and the IRS rules, but you can check out our other guides for Australia and the UK for information about where you live.
Is lost crypto a capital loss?
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 your exchange is 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 by 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 taxpayers with crypto assets worth less than $0.01 - such as investors left with UST tokens. The IRS says there can be no deduction for losses on holdings that 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.
However, if you can dispose of your asset still, you might be in luck.
What about losses from rug pulls?
In some circumstances - like with a rug pull - you'll still be in possession of your asset, it will just be worthless. This is actually good news for US investors from a tax perspective as it means they can realize their loss by disposing of their assets and creating a capital loss to offset their gains. Here's how to realize a loss:
- Sell 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
- Send your tokens to a burn wallet
How does Koinly deal with lost or stolen crypto?
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.
- Crypto is often lost due to hackers, scammers or even losing your private keys.
- Some tax offices let you claim lost or stolen crypto as a capital loss, but others don't.
- The IRS does not let you claim lost or stolen crypto as a capital loss.
- HMRC let you make a negligible value claim for lost and stolen crypto.
- The ATO let you claim lost or stolen crypto as a capital loss - but you'll need proof.
- The CRA has no clear guidance on whether lost or stolen crypto can be claimed as a capital loss.
The information on this website is for general information only. It should not be taken as constituting professional advice from Koinly. Koinly is not a financial adviser or registered tax agent. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. Koinly is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.