Is Lost Crypto a Capital Loss?
Around $1.3 billion in crypto was stolen throughout 2023. Suffice it to say, that losing crypto to scams, hacks, or even just misplacing private keys is rife. As a largely unregulated industry, there's not much you can do to recoup your losses, but from a tax perspective, lost crypto presents a small silver lining as the ATO may let you claim a capital loss - if you have enough proof. Learn everything you need to know about lost crypto and tax.
The crypto industry is rife with scams and hackers, and far too many investors have fallen foul of losing their private keys and access to their wallets. Well, it's good news for Aussies as you have a lot of avenues available to you to recoup your losses - whether that's by claiming for a capital loss or realizing a loss through a transaction.
All this depends on the exact way you lost your crypto, so we'll cover some common scenarios.
Lost crypto and capital losses
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 back.
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 gains.
Rug pulls and capital losses
Another common way investors lose out is through rug pulls or other similar scams where the price of a given token or coin is hyped, and overinflated, and then the creators quickly make off with investors' money while the value plummets to zero. Some notable examples in recent years include the Squid Game rug pull and the Luna Yield rug pull. Of course, coins and tokens can also plummet to zero without an obvious sign of a scam - as with the Terra crash.
In this instance, you haven't actually lost your tokens, or access to them (unless the blockchain is halted). So the likelihood of making a successful claim for a capital loss is low. Instead, you need to realize your loss in order. This means you need to make capital disposal - by selling, swapping, spending, or gifting your crypto. So you can:
Sell your tokens on an exchange if possible
Swap your tokens for another token - potentially using a native wallet to do so if exchanges have halted transactions with a given token
Spend your tokens with a DeFi protocol if possible
Gift your tokens by sending them to a friend, family, or stranger
Send your tokens to a burn wallet
Once you've realized your loss, you can use it as a capital loss and offset it against any capital gains for the year, or carry it forward to future tax years if you have more losses than gains. Remember, to best utilize capital losses, you should offset them against your short-term capital gains first! Careful though, if you sell and repurchase an asset purely to realize a loss within a short period of time, the wash sale rules may prevent you from using any losses to offset future gains. The ATO states there are a number of factors that may make a transaction a wash sale - it all comes down to intent.
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, like PancakeSwap, 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.
Halted transactions and capital losses
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 are now unable to withdraw their assets from the platform since the company filed for Chapter 11 bankruptcy. Investors will be unable to claim a capital loss while these proceedings are ongoing as it’s currently unclear how much, if any, of their investment they may see returned. However, when proceedings are finished and any reimbursements have been made, investors may be able to claim any assets that were not recovered through bankruptcy proceedings as a capital loss later down the line and offset their gains at a later date.
EXAMPLE
You held crypto on 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 Koinly can help
If you've lost tokens due to a scam or hack - 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 claim with the ATO.
