Losing access to your crypto is unfortunately a common occurrence in the crypto world: whether it’s due to forgetting your seed phrase to a particular wallet, a project you’ve bought into has been rug pulled, or one of your favourite NFT project’s being hacked. While the monetary fallback of a situation like this is more than enough to impact you directly, there are tax implications that could help your position.
Anyone in the crypto space in 2021 remembers the monumental rise and fall of the Squid game token. Bootstrapped by the exponential rise of the Squid Game Netflix series, the Squid token promised a play-to-earn game and positive tokenomics landscape. After more than 43,000 investors had committed to the project, the developers became unreachable. Furthermore, built into the smart contract was an anti-dumping mechanism which meant that no investor could sell the tokens from a decentralized exchange. Needless to say, a lot of people were impacted negatively.
Another example is the more recent Solana hack that occurred. The Summ (formerly Crypto Tax Calculator) team wrote up a thread on Twitter discussing the possible tax implications of the hack, which were discussed further in this article on Cointelegraph.
While these examples are quite dramatic, there are also much simpler ways of losing access to your crypto. Newbies to the space might not take the prompts to protect their private keys seriously, a user might send their crypto to a burn address by mistake - the list goes on.
If you lose access to your crypto through one means or another, we’re sure you’re wondering what this means for your tax return: is this displaced crypto claimable as a loss, or do you still need to report it as though it’s still in your possession?
The main question you would want to ask is if your lost, stolen or hacked crypto can be claimed as a capital loss. Capital losses can generally be used to offset any capital gains made in a financial year, thereby bringing down the overall taxes owed. The answer to this original question depends on what region you are in.
In Australia, the ATO has provided a clear set of guidelines pertaining to lost or stolen cryptocurrency. You can read their detailed explanation here. To summarise, if the situation that resulted in you losing your cryptocurrency falls into any of their guidelines, you will be able to claim those losses as a capital loss and offset any capital gains made. Read more information in our 2022 Australia crypto tax guide here.
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. We advise you to work with your local tax professional to determine how best to approach a situation like this. When you’ve come to a conclusion on how to proceed, we have options available in the Summ app to ‘ignore’ particular transactions so that they aren’t counted as relevant to your taxable values.
In the UK, the HMRC doesn’t recognize a loss of crypto as a disposal event, meaning that it isn’t subject to Capital Gains Tax and cannot be claimed as a capital loss. Similarly, the HMRC doesn’t recognize theft of crypto to be a disposal event either, so it too cannot be claimed as a capital loss. The only way to successfully claim any lost, stolen or hacked crypto against your capital gains would be to file for a Negligible Value Claim with the HMRC.
How can Summ help if you’ve lost, or had crypto stolen or hacked?
In our platform, we give you the ability to categorize transactions as ‘lost’, ‘stolen’ or ‘ignore out’. If you choose to categorize a transaction as either ‘lost’ or ‘stolen’, the algorithm will trigger a capital loss event with the sale price being zero. If you are based in a region that doesn’t recognize capital losses on lost, stolen or hacked crypto, you can choose to ‘ignore out’ which will disregard the tagged transactions from taxable value calculations. In this situation, it’s recommended to work with a local tax professional to determine what action is best for your personal circumstances.
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