Losing access to your cryptocurrency is an unfortunate reality in the crypto world. Whether it’s a forgotten private key, a rug pull, or a hack on an NFT project, these incidents can have financial and tax implications. This guide explains how to handle this type of transaction in CTC and the possible tax implications in your country.
Disclaimer: This guide is for informational purposes only and does not constitute tax advice. Always consult with an accountant or tax professional to discuss your specific situation.
Common Scenarios of Crypto Loss
Forgotten Seed Phrase: Losing access to wallets due to misplaced or forgotten private keys
Rug Pulls: Projects where developers abandon a token after collecting investments, as seen in the infamous Squid Game token collapse.
Mistaken Transactions: Sending crypto to a burn address or an incorrect wallet address.
Hacks: Thefts resulting from breaches of wallets or NFT projects, like the Bored Ape Yacht Club incident.
Handling Lost, Stolen, or Hacked Crypto in CTC
Step 1: Categorizing Lost, Stolen, and Hacked Transactions
You can categorize your transactions as ‘Lost’ or ‘Stolen’. Consult a tax professional for expert advice if unsure of your situation.
Category | Description |
This will trigger a capital loss event with the sale price being zero. | |
Similar to the ‘Lost’ category, this will trigger a capital loss event with the sale price being zero. |
Learn more:
Categorization Examples
Scenario | Solution |
1. You accidentally sent 1 ETH to the wrong wallet address. | Categorize the outgoing 1 ETH as Lost. |
2. You lost 1 BTC for some reason (e.g. rug pull) but do not have the outgoing transaction representing the lost crypto. | Use the Add Transaction button on the Transactions page to manually create a ‘Lost’ transaction. Learn how to add a manual transaction. |
Step 2: Review Figures in the Outgoing Gift and Lost/Stolen Assets Report
This report includes a detailed record of every ‘Outgoing Gift, ‘Lost’, and ‘Stolen’ transaction. You can share this with your accountant or use the figures to file your taxes.
Tax Implications of Lost, Stolen, or Hacked Crypto
The key tax question is whether lost, stolen, or hacked crypto can be claimed as a capital loss to offset capital gains. The answer depends on your tax jurisdiction. Below are guidelines for some countries. If your country isn’t listed, consult a local tax professional for advice.
Key Points
Country | Claimable as Capital Loss? |
Yes, if the loss falls under the Australian Taxation Office (ATO) guidelines. See their detailed explanation. | |
No, due to the IRS 2017 tax reform. Only a casualty loss that is a direct result of federally declared disaster can be tax-deductible. Work with a tax professional for guidance. | |
No. You can file a Negligible Value Claim instead. |
Australia
In Australia, the ATO has provided a clear set of guidelines pertaining to lost or stolen cryptocurrency. You can read their detailed explanation here. If the situation that resulted in you losing your cryptocurrency falls under any of their guidelines, you can claim those losses as capital loss and offset any capital gains made.
United States
In the US, capital losses previously fell into two categories: casualty losses and theft losses. After the IRS tax reform in 2017, only a casualty loss that is a direct result of a federally declared disaster can be tax-deductible. This means that any lost, stolen, or hacked crypto cannot be claimed as a capital loss.
Given the complexities of tax regulations, it's recommended to consult with a tax professional to understand the specific implications of your situation.
United Kingdom
The HMRC does not recognize the loss and theft of crypto as a disposal event. Therefore, it isn’t subject to capital gains tax and cannot be claimed as a capital loss. Instead, you can file a Negligible Value Claim with HMRC.
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