Are Cryptocurrency Losses from Scams Tax Deductible?

With the recent collapse of a second Australian cryptocurrency exchange in as many months, along with persistent reports of a range of sophisticated cryptocurrency scams targeting Australians, many cryptocurrency owners are asking whether it’s possible to deduct the loss in your Tax Returns if you lose money in a scam. The short answer is it depends. This blog post from our tax accountant in Melbourne explores the topic and details what you need to know.

Cryptocurrency Scams

Cryptocurrency scams can come in a variety of forms, with the most common being impersonation, where scammers pretend to be from a reputable trading platform and have legitimate-looking digital assets (e.g. fake trading platforms which look like the real thing, email addresses that approximate a genuine company they’re impersonating, etc.) to lure investors in. Investors who fall into this trap will usually see the initial money they invested skyrocket on fake trading platforms and may even be allowed to access a small return. Once hooked, the scammers will ask for further investments of large sums of money before cutting off contact and disappearing completely.

When Can You Claim a Tax Deduction?

It all boils down to whether you actually owned an asset. For example, if you actually owned cryptocurrency such as Bitcoin in a digital wallet and due to the collapse of an exchange all the cryptocurrency you owned has disappeared, then it is likely that you will be able to claim a capital loss. Similarly, this would also apply if the cryptocurrency you own is stolen in a scam.

According to the ATO, to claim a capital loss on cryptocurrency, you may need to provide the following kinds of evidence:

• When the private key to the cryptocurrency was acquired and lost
• The wallet address that the private key relates to
• Costs incurred to acquire the lost or stolen cryptocurrency
• Amount of cryptocurrency in wallet at the time of loss of private key or access
• Ability to show that the wallet was controlled by you (i.e. transactions linked to your identity) and that you are in possession of the hardware that stores the wallet
• Transactions to the wallet from a digital currency exchange for which you hold or held a verified account are linked to your identity

If you have the above supporting information, you will be able to claim a capital loss on your tax return in the year that the loss or theft of Bitcoin occurred. This can be offset against current year capital gains, or carried forward to offset future capital gains.

When You Cannot Claim a Tax Deduction

For those individuals who have been scammed into investing in cryptocurrency where no actual cryptocurrency ownership occurred, it is unlikely that a deduction can be claimed, capital or otherwise. This is because you have not technically lost an asset, as you did not own it in the first place, and under tax law, money is not considered to be a CGT (Capital Gains Tax) asset.

Want to Learn More?

If you have been dabbling in cryptocurrency and/or NFTs, our certified accountant in Melbourne can help you understand the tax implications involved, including any income you have to report or any losses you can deduct depending on individual circumstances. Contact us today for expert help and advice.