Are cryptocurrency losses from scams deductible?

As investing in cryptocurrency becomes more prevalent in Australia, there is also a corresponding increase in scams being reported. 

Scamwatch, a part of the ACCC (Australian Competition and Consumer Commission), estimates that Australians lost over $70m in investment scams in the first half of 2021. Of this $70m, around half, or $35m were lost to cryptocurrency, especially Bitcoin. Cryptocurrency scams were also the most commonly reported type of investment in 2021, with around 2,240 reports.

While the figure of around 2,000 Australians being scammed does not seem exceptionally high, keep in mind that most scams go unreported due to embarrassment or other factors, so the actual figure is likely to be much higher.

If you’re one of the unlucky ones to have been scammed, depending on your circumstances, a capital loss may be claimed.

It all boils down to whether you owned an asset. For example, suppose you owned cryptocurrency such as Bitcoin in a digital wallet, and due to the collapse of exchange, all the cryptocurrency you owned has disappeared. In that case, it can likely 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 a wallet at the time of loss of private key or access;
  • able to show that the wallet was controlled by you (i.e. transactions linked to your identity) and that you own 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 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. This can be offset against current year capital gains or carried forward to offset future capital gains.

For individuals who have been scammed into investing in cryptocurrency, although no actual cryptocurrency ownership occurred, it is unlikely that 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 asset.

If you have invested in cryptocurrency and/or NFTs, we 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 enquiries@rm.net.au.

**The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

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