Crypto Tax Write Offs: Crypto Losses, Thefts & Bankruptcy
From a tax perspective, crypto losses present a small silver lining as the ATO may let you claim a capital loss depending on the circumstances around your loss. Learn everything you need to know about crypto tax write-offs and claiming crypto losses on taxes in Australia.
Can you claim crypto losses on taxes in Australia?
Yes. When you realize a loss from a crypto investment, you can offset this loss against any taxable gain from crypto or other similar investments on your tax return to reduce your overall tax bill.
This does, however, depend on the circumstances of your loss. If it's as simple as your investment went bad and you sold it at a loss, then it's straightforward. If you have a loss from other circumstances, like theft, a scam, or a crypto platform going bust, then it's not quite so clear-cut. Let's dive into it.
Is lost crypto a capital loss in Australia?
If you lose your private key or your crypto is stolen by a hacker or scammer, you may be able to claim a capital loss.
The potential claim is based on whether the amount lost can be irrecoverable. So if you've lost your private key and you'll never be able to access your crypto again, this is more likely to be a successful capital loss claim. Similarly, if you had your crypto stolen in a phishing scam and you had no hope of retrieving it, you would be more likely to successfully claim a capital loss with the ATO.
On the other hand, if your crypto was stolen in a major hack of an exchange, if the exchange is likely to reimburse you for your loss, you would be unlikely to be able to claim a capital loss with the ATO.
Furthermore, you'll need a lot of evidence to claim a capital loss due to loss or theft with the ATO. To claim a capital loss, you’ll need evidence:
When you acquired and lost your private key
The wallet address that the private key relates to
What it cost you to acquire the lost or stolen crypto
The amount of crypto in the wallet at the time of the loss of your private key
That the wallet was controlled by you
That you are in possession of the hardware that stores the wallet
Transaction records to the wallet from an exchange you have an account with
EXAMPLE
You unfortunately fall for a phishing scam, and a scammer gains access to your wallet and steals your crypto. You are unable to retrieve your crypto.
In this instance, provided you could give evidence of the wallet address, proof of ownership, the value of the stolen crypto, and show the transaction of theft, you'd likely be able to claim a capital loss, which you could then offset against your capital gain.
Read next: Crypto Taxes Australia
Capital losses from rug pulls
Investors often lose out in crypto through scams like rug pulls, where token prices are pumped up before creators vanish with the funds, leaving tokens worthless. Examples include the Squid Game and Luna Yield rug pulls. Although sometimes, coins plummet to zero without a clear scam, as seen with the Terra crash.
In these cases, you don’t lose access to your tokens (unless the blockchain halts), so claiming a capital loss is tricky. Instead, you need to realize your loss by making a disposal. You can do this by:
Selling them on an exchange
Swapping them for another token (perhaps using a wallet if exchanges are frozen)
Gifting them to someone
Burning them by sending them to a burn wallet
EXAMPLE
You invested in SQUID tokens at the height of their popularity. These are rugged shortly after, and the value plummets to be virtually worthless.
You have a few options to realize your loss here. If possible, use a dex still trading the token to swap your tokens, even if it's for a negligible amount. If you're unable to do this, you could gift your tokens to dispose of them in Australia, or alternatively, send them to a burn address to dispose of them. Any of these transactions would help you realise your loss, meaning you can then offset it against any gains.
Losses from platform bankruptcy or collapse
In the rare instances where a blockchain or company halts transactions permanently and you're unable to move or transact with your crypto, you would potentially be able to make a claim for a capital loss should the company go into liquidation, but this takes time.
For example, Celsius investors were unable to withdraw their assets from the platform since the company filed for Chapter 11 bankruptcy. While proceedings were ongoing, investors were unable to claim a capital loss. Now, there is a plan for partial reimbursements, and proceedings are largely concluded; investors have a clearer idea of their loss. Investors may now be able to claim any assets that were not recovered through bankruptcy proceedings as a capital loss.
EXAMPLE
You held crypto on the FTX exchange. When the exchange collapsed, you were unable to withdraw your funds before operations halted. FTX is now going through bankruptcy proceedings in the US. It's not clear how long these proceedings will take.
The ATO is very clear that while investors may experience financial loss from exchanges going into administration, no capital loss will arise before administration is finalised.
How to claim crypto losses on taxes in Australia
If you’re an investor (not a professional trader) and you dispose of cryptocurrency at a loss, you may use that loss to offset capital gains for the year. This reduces the net capital gain and lowers your CGT. To claim a loss, you must:
Dispose of the cryptocurrency before 30 June
Realize a capital loss on disposal
Hold the cryptocurrency as an investment
Keep accurate transaction records
If you have a loss from crypto, you report it in your annual lodgement to claim it. How you'll do this depends on how you'll file and your financial circumstances. If you have more than $10,000 in total capital gains/losses, you'll need to file a CGT Schedule.
Check out our guide on how to report crypto on taxes with ATO myTax.
How Koinly can help
Koinly can help you when it comes to tax time. It can calculate your gains and losses and generate ATO tax reports to help you file easily. It can also help you identify unrealized losses in the tax optimization dashboard.
If you have lost crypto, Koinly can factor this into calculations. 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 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 claim with the ATO.
