Capital loss for crypto scams?
As investing in cryptocurrency becomes more popular in Australia, there is also a corresponding increase in the number of scams being reported. Due to the unregulated nature of cryptocurrency and the recent failure of two Australian cryptocurrency exchanges, this investment space has become a risky free-for-all, with Scamwatch estimating that around $35 million was lost to cryptocurrency scams in the first half of 2021. If you’re one of the unlucky ones to have been scammed, depending on your circumstances, a capital loss may be claimed for tax purposes.
It depends ...
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, “If you lose money in a scam can you deduct the loss?”. The short answer is “It depends.”.
Scamwatch, a part of the Australian Competition and Consumer Commission, estimates that Australians lost over $70 million in investment scams in the first half of 2021. Of this $70 million, around $35 million was lost in cryptocurrency, especially Bitcoin. Cryptocurrency scams were also incidentally the most commonly reported type of investment scam in 2021, with around 2,240 reports.
While the figure of around 2,000 Australians being scammed does not seem particularly high, keep in mind that most scams go unreported due to embarrassment or other factors, so the real figure is likely to be much higher.
Crypto scams
Cryptocurrency scams can come in a variety of forms, 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 appear to be from a genuine company that they are actually impersonating) to lure investors to part with their money.
Investors who fall into this trap will usually see the value of the digital assets they invested in skyrocket in value on fake trading platforms. Investors may even be allowed to access a small return to give the investment a genuine appearance. Once investors are hooked, the scammers will ask for further investments of large sums of money before cutting off contact and disappearing completely.
Can you deduct a scam loss?
Back to the original question of can you deduct a loss?
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 are able to claim a capital loss.
This would also likely be the case if the cryptocurrency you own is stolen in a scam.
Evidence you need to prove your loss
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;
- the amount of cryptocurrency in your wallet at the time you lost your private key or access;
- you can demonstrate 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; and
- transactions to the wallet from a digital currency exchange for which you hold or held a verified account or that is 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.
However, this capital loss can only be offset against current year capital gains or carried forward indefinitely to offset against future capital gains.
What if you never got the crypto?
Unfortunately, for those individuals that have been scammed into investing in cryptocurrency where no actual cryptocurrency ownership occurred, it is unlikely that a capital loss can be claimed.
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 asset.
Want to learn more?
If you have been dabbling in cryptocurrency, we can help you understand the tax implications involved, including any income you have to report or any losses you can deduct depending on your individual circumstances. Contact us today for expert help and advice.
For expert advice and assistance in dealing with your Personal Crypto Tax in Australia, please contact Mathews Tax Lawyers on 1800 685 829
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.