Home » All Posts » How to Report Stolen, Lost, or Scammed Coins on Your Taxes

How to Report Stolen, Lost, or Scammed Coins on Your Taxes

Key Takeaways:

  • Learn about how to deduct lost or stolen cryptocurrencies from your tax liability.
  • Learn how to protect your cryptocurrencies from any losses.

Cryptocurrency thefts and scams are increasing each year. Here’s how to report stolen cryptocurrency during your tax filing.

How to Deduct Lost Cryptocurrencies

Can you use a crypto loss for a tax write-off? That completely depends on your country of location. For instance, in the U.S, lost cryptocurrencies are referred to as casualty losses – or the damage of owned property from a sudden or unexpected event. Under U.S IRS law, a casualty loss is tax deductible only if the loss is declared as a “disaster” by the federal government.

For cryptocurrencies, a casualty loss technically means losing access to your crypto wallet or sending your crypto assets to the wrong wallet. Under the following circumstances, you cannot claim a crypto loss tax deduction:

  • You lose your private keys.
  • Lost your crypto holding due to negligence.
  • Transfer your crypto assets to the wrong wallet address.

How to Deduct Stolen Cryptocurrencies

Besides crypto losses, cryptocurrencies can also be stolen by a cybercriminal. A stolen cryptocurrency can be in the form of stolen coins, hacked wallets, or a compromised crypto exchange.

Cryptocurrencies thefts can occur in any of the following forms:

  1. Crypto Exchange Hacks

This happens when crypto hackers exploit vulnerabilities in the crypto exchanges to gain illegal access to user accounts. One such example is that of Crypto.com where Bitcoin and Ethereum worth around $30 million were stolen in January 2022.

  1. Malware

Crypto hackers can also use malware variants to steal user credentials from their computers or mobile phone. For instance, the CryptBot malware was deployed to steal users’ wallet details and then Bitcoin was worth nearly half a million dollars.

  1. Physical theft

This includes crypto thefts that are a result of stolen mobile phones, computers, or even hardware wallets. Hackers have emailed hacked hardware wallets to users – and then used them to steal their cryptocurrencies.

Unlike thefts of physical cash or credit cards, stolen cryptocurrencies cannot be easily recovered. Similar to casualty losses, stolen cryptocurrencies are not liable for a tax deduction.

How to Deduct Cryptocurrency Scams

Cryptocurrency scams are becoming more common in the world of cryptocurrencies. One such fraudulent scam was the BabyMaskCoin Initial Coin Offering (ICO) where the company founder ran away with over $2 million.

Can you write off being scammed? Yes, you can report crypto scams for tax benefits if you have lost your crypto assets due to such scams. Crypto scams are classified as “investment losses” thus making them tax deductible. You can deduct your losses from any capital gains – and up to a maximum of $3,000 of your yearly income. If you have incurred a loss of more than $3,000, you can also carry forward the losses to the next financial year.

Unlike crypto thefts and losses, cryptocurrency scams are tax-deductible as they come under-investment losses. If you are a U.S citizen, you can report these losses in Form 8949 and Form 1040 (Schedule D) – and claim tax deductions.

Instead of looking for tax deductions against crypto thefts, losses, or scams, it’s always advisable to avoid these losses in the first place. Let’s check how to prevent these losses in the next section.

How to protect against Cryptocurrency losses

Here are some steps you can take to protect your crypto assets from losses:

  1. Insured Exchanges

First, select reliable cryptocurrency exchanges that insure their user’s deposits against any losses. Some exchanges also provide insurance against security breaches on their platform.

  1. Cryptocurrency insurance

You can protect your cryptocurrencies from theft using Crypto Insurance policies. For instance, there are insurance policies of up to $100,000 against crypto theft from your account.

  1. Due diligence

Before investing, take due diligence when evaluating any cryptocurrency opportunity. For instance, study the fine print of any ICO, or whitepapers, and ensure that every new opportunity is backed by reputed investors or companies.

  1. Cold storage

For the best protection, make sure you keep your cryptocurrency investments in cold storage – that hackers cannot access easily. At the same time, make sure you don’t lose your devices or private keys.

  1. Diversification

As the investment mantra goes, “Do not put all your eggs in the same basket.” Diversify your crypto holding by investing in different cryptocurrencies. Additionally, choose multiple DeFi platforms to invest instead of a single platform.

Additionally, investment instruments like Exchange-traded funds (ETFs) are safe and reliable as they do not involve direct ownership of crypto assets.

The Bottom Line

Be it in the form of cryptocurrency losses, thefts, or scams, it’s not clear if you can claim tax deductions on these losses. It’s also critical to protect your crypto holdings or portfolio using the preventive measures outlined in this article.

Are you confused about claiming tax deductions if you have been a victim of any of these violations? Binocs can answer your queries. You can also safeguard your future investment by creating a crypto portfolio on our platform. Visit our website to know more!

Frequently Asked Questions

  1. Where do I report crypto losses on my taxes?

In India, you can report any long-term capital gains (or losses) for cryptocurrencies under the CG section of the ITR-2 and ITR-3 forms. U.S citizens can report their crypto losses in Form 8949 and Form 1040 (Schedule D) for the financial year.

  1. Can I write off lost crypto?

No, you cannot write off any cryptocurrency losses against any other earned income – neither can you carry forward the loss to the next financial year.

  1. Do I have to pay tax on crypto loss?

Under the new tax provisions in India (applicable from April 2022), investors are liable to pay a 30% tax on any crypto gain. Any crypto loss is not deductible from the applicable tax.

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