The Tax Rules on Lost or Stolen Crypto

Hacks at crypto exchanges are always a real possibility when you decide to engage in the crypto industry. It can usually cause severe emotional distress and have a huge financial impact of you were a major trade. However, it can also have an impact on your crypto taxes. Here is an insightful look into your tax obligations after your exchange is hacked and your crypto was stolen.

The Rules on Stole Crypto

Since the early days of the blockchain era, hackers have always found stealing crypto an enticing enterprise. When crypto is properly stored, it is impossible to steal. Its decentralized nature means that it can be isolated is a device the size of a thumb drive. However, when stored on an online crypto exchange, it becomes vulnerable to theft by hackers.

The most common method that hackers steal crypto is via online exchanges. Instead of attempting to rewrite the blockchain via a 51% attack, they find it easy to monitor crypto exchanges and exploit any vulnerability on the platforms. In some cases, the hackers will also steal data from an exchange and use it to target the users.

Thus far, over $1.3 billion worth of crypto has been stolen from exchanges. Hacks targeting crypto exchanges are a growing problem. For instance, data from Block Genesis showed that over 61% of all exchanges hacks occurred from January 2018.

Once crypto is stolen from any exchange, it can lead to huge losses for the users. In some cases, the crypto is recovered but in most cases, the losses are permanent. What are the implications for taxes on lost crypto when the stolen coins cannot be recovered? Here is a look at how it could play out.

Crypto Hacks and Taxation

Determining the taxes on lost Bitcoin are complex issues since crypto is still quite new as an instrument for storing and transmitting value. The rules on crypto taxation are always evolving, which makes determining the tax implications on the stolen crypto complex.

Depending on the jurisdiction and how the crypto was stolen, the theft could be deductible. For instance, in the US, the loss of crypto from an exchange hack is classified as a theft hack or capital loss. The classification depends on the specific circumstances under which the crypto was stolen.

In the US, the Internal Revenue Service considers crypto such as Bitcoin to be convertible digital currencies. It means that hacking an exchange meets the criteria of criminal appropriation of another’s property. As a result, those affected by a hack at an exchange can deduct the loss from their capital assets. The deduction comes with a 3000 USD annually, which means that investors who lose huge amounts of crypto during an exchange hack may not benefit much.

Australian Tax Laws on Exchange Hacks

The rules on tax on stolen crypto vary a great deal between the US and Australia. While the tax laws in the US are forward-leaning when it comes to crypto stole during an exchange hack, things can be quite complex in Australia.

In Australia, traders and holders of crypto can claim a capital loss is two instances:

  • If they lose the private key to their crypto wallet
  • Their crypto is stolen

The ATO appears to understand that crypto is very complex. However, to claim those trading losses, a crypto owner or trader has to provide extensive supporting documents.

For instance, if a person loses a private key, they have to provide the dates when the private keys were acquired and lost, the wallet address, as well as proof that they owned the wallet.

For a crypto exchange hack, the claimants have to verify that they held a wallet at the hacked exchange. To do that, they only need to prove that they had an account at the exchange linked to their identity. For exchanges that do not enforce KYC requirements, a person has to show they own the wallet at the exchange by showing transactions that link their wallet to their identity.

Engage the Services of a Professional

If you have a crypto tax software, keeping track of your transactions for tax purposes can be a simple process. By using a Bitcoin Tax Calculator, you will quickly understand your tax obligations. However, after an exchange hack, things can get quite complex.

The reason for this is that investigations will be initiated. You have to wait for the investigators to issue a report determining how the hack took place. All of this can be a huge headache as you cope with a potentially huge loss.

If you are a victim of a crypto exchange hack, you need to understand all the options available to you to recover your crypto. Whether you qualify for a capital loss deduction can be a long and complex process. To ensure you get it right, engage the services of a professional. The tax professional ensures that you fill out the right forms and fill in all the details before you file your taxes.