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Crypto scams are a prevalent problem in the digital currency space, causing significant financial losses for many individuals. Whether you've fallen victim to phishing attempts, rug pulls, or giveaway scams, the loss of funds raises important questions about tax implications. 

In this article, we delve into the subject of taxes and crypto scams, providing valuable insights into whether you can treat your lost coins as a capital loss and potentially offset it against any gains you may have. 

What You Need to Know about Crypto Scams

Crypto scams are diverse and ever-present in the cryptocurrency market, making it crucial to understand their different forms. Some common types of crypto scams include phishing scams, giveaway scams, rug pulls, and dusting attacks.

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Phishing scams, although not exclusive to the crypto industry, involve fraudsters impersonating legitimate entities, such as crypto exchanges, to deceive users into revealing their private keys and gaining access to their crypto wallet funds. Giveaway scams operate by offering enticing opportunities with promises of significant returns, such as airdrops, to persuade crypto investors to surrender their coins.

Rug pulls have gained prominence in the decentralized finance (DeFi) space. Scammers create DeFi protocols with unrealistically high yield returns, only to abandon the project and abscond with the funds invested by individuals. 

Similarly, such scams can occur in the centralized crypto market, where scammers launch new coins with exaggerated growth potential but disappear after collecting funds from investors.

Dusting attacks, although not new, are on the rise and require attention to avoid falling victim. In crypto, dust refers to small amounts of coins or tokens that are insufficient to cover transfer fees, rendering them untransferable. Malicious actors take advantage of this by conducting dusting attacks, where they send small amounts of crypto (dust) to various wallet addresses. By analyzing the dusted addresses, scammers can link them to specific individuals or companies, facilitating phishing attacks or extortion threats.

If you have been unfortunate enough to experience a crypto scam, you are not alone. However, expecting to write off the loss as a capital loss for tax purposes is not always straightforward. The complexities of crypto scams and tax implications make it essential to navigate the situation carefully.

Tax Implications of Crypto Scams: Do You Owe Taxes on Lost Coins?

Fortunately, when it comes to losing your crypto due to theft, it is not considered a disposal. This means you are not obligated to pay capital gains tax on any gains resulting from the difference in value between the day the coins were sold and the day they were acquired. 

While this approach may seem obvious and fair, crypto investors are well aware that the IRS rarely overlooks opportunities to tax cryptocurrencies.

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However, for victims of crypto hacks who have lost their assets completely, a more significant question arises: Can they claim a capital loss? 

Can You Claim Capital Losses on Stolen Coins?

No, you cannot claim crypto lost in a scam as a capital loss in many countries, including the US, because theft is not considered a disposal of a capital asset and is therefore not subject to Capital Gains Tax. 

As a result, you cannot write off stolen crypto as a capital loss, and there will be no realized gain or loss recognized for tax purposes.

However, it's important to note that tax treatment may vary depending on your country of residence. Different tax offices around the world have different rules regarding the ability to claim crypto scams as a capital loss. 

It is advisable to consult the specific guidelines provided by your local tax authority to understand the tax implications of crypto scams in your jurisdiction.

IRS and Crypto Scams

The IRS has a clear stance on crypto capital losses. According to their guidelines, theft losses of crypto cannot be claimed as a capital loss. However, before 2017, it was possible to claim theft losses of crypto as a capital loss. 

The Tax Cuts and Jobs Act of 2017 suspended the deduction of personal casualty and theft losses, except in federally declared disaster areas. As a result, casualty and theft losses of crypto are no longer considered capital losses and are not tax deductible.

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It's worth noting that many of the individual tax reforms included in the 2017 bill are set to expire in 2025. This means that in the future, theft and casualty losses may once again be eligible for claiming as capital losses. 

However, it's important to stay updated on any changes in tax laws and consult with a tax professional for specific advice regarding your situation.

HMRC and Crypto Scams

HMRC (Her Majesty's Revenue and Customs) provides clear guidance on crypto capital losses, including cases involving stolen crypto through scams. According to HMRC, theft is not considered a type of disposal, such as a sale or trade. Therefore, you cannot claim stolen crypto as a capital loss to offset against your capital gains.

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However, there is a potential opportunity for investors who have fallen victim to scams where the coins they purchased under pretenses become worthless. In such cases, it may be possible to make a "negligible value" claim. 

This claim allows individuals to treat the worthless assets as if they have been disposed of, potentially resulting in a capital loss that can be offset against capital gains.

ATO and Crypto Scams

The Australian Taxation Office (ATO) guides dealing with crypto scams and stolen crypto. In Australia, you can claim stolen crypto as a capital loss to offset your capital gains.

However, there is an important requirement: you must have sufficient evidence to prove that your crypto was stolen as a result of a scam. This evidence may include:

• Dates indicating when you received the stolen assets and when the theft occurred.
• The wallet address associated with the private key.
• Documentation demonstrating the costs you incurred to acquire the stolen crypto.
• Evidence of the amount of crypto held in the relevant wallet before the theft.
• Proof of ownership of the wallet or possession of the hardware that stores the wallet.
• Documentation of transactions you make to the wallet, such as transfers from an exchange.

It's crucial to gather and maintain comprehensive records to support your claim for a capital loss due to stolen crypto. By providing the necessary evidence, you can obtain tax relief.

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It's important to note that the possibility of claiming a capital loss applies to crypto investors in the traditional sense. However, if the ATO categorizes the coin as a personal use asset — an asset primarily used for personal consumption or purchasing items for personal use — any crypto losses will be disregarded for tax purposes.

Always consult with a tax professional or refer to the ATO's official guidelines for specific advice tailored to your situation.

CRA and Crypto Scams

The Canada Revenue Agency (CRA) does not currently have specific guidelines addressing crypto scams and whether stolen crypto can be claimed as a capital loss. However, it is worth noting that the CRA allows other stolen capital assets to be claimed as a capital loss, which suggests that they may apply similar rules to stolen crypto.

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In Canada, the adjusted cost basis method is used for calculating capital gains and losses. When it comes to stolen crypto, you can only claim the original investment amount as a capital loss, not any unrealized gains. 

For instance, if you purchased ETH for $1,000 and lost it in a crypto scam when the value of ETH was $4,000, you would only be eligible to claim a capital loss of $1,000 to offset against your capital gains.

Simplify Crypto Taxes with Kryptos

Looking to file your cryptocurrency taxes? Cryptocurrency tax software like Kryptos can help.

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With 100+ wallets and exchanges and 2000+ DeFi protocols supported on the platform, you can easily add all your crypto transactions and generate pre-filled tax reports that comply with your country’s tax laws.

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FAQs

1. Can I recover my scammed crypto?

Recovering scammed cryptocurrency can be extremely challenging, and in many cases, it might be impossible. Once a transaction is confirmed on the blockchain, it cannot be reversed. If you fall victim to a scam, you should report the incident to local law enforcement and any relevant regulatory agencies. They may be able to take legal action, but recovering the funds is often unlikely.

2. Is crypto scamming illegal?

Yes, crypto scamming is illegal. Engaging in fraudulent activities, misrepresentation, or deception to obtain cryptocurrency from someone else is a criminal act in most jurisdictions. Victims should report scams to local law enforcement and regulatory agencies, providing as much detail as possible to aid in any investigation.

3. Is crypto taxable if someone sends me it?

Generally, receiving cryptocurrency as a gift, payment for goods or services, or even as a result of a scam could be subject to taxation. The exact tax treatment depends on the jurisdiction and the specific circumstances of the transaction. Consulting with a tax professional or referring to the tax guidelines in your country will provide clarity on your tax obligations.

4. Can I claim a tax deduction on a crypto scam?

In some jurisdictions, losses from fraudulent activities, including crypto scams, may be deductible on your tax return. The nature and extent of the deduction can vary widely based on the tax laws in your country. It's essential to maintain detailed records of the incident and consult with a tax professional to understand how to properly claim such a loss on your taxes.

5. Is stolen crypto taxable?

Stolen cryptocurrency typically falls into a complex area of tax law. In some jurisdictions, you may be able to claim a theft loss deduction, while in others, the loss might not be deductible at all. The tax treatment of stolen crypto can depend on various factors, such as the nature of the theft, the laws in your jurisdiction, and your specific situation.

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All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!