Whether you are a crypto trader or investor, you most likely have the task of…
My Crypto Exchange Has Been Hacked! What is the Tax Outcome?
Crypto Exchange hacks have a devastating financial impact — but can also affect your taxes. This guide will help you understand what to do at tax time after an exchange hack & potentially stolen crypto.
Cryptocurrency holders have been targeted by bad actors since the earliest days of the blockchain revolution. Cryptocurrency itself, when stored correctly, is highly secure. The decentralized nature of crypto ensures that it can be isolated and stored securely — when stored on a centralized exchange platform, however, holding crypto becomes a high-risk endeavor.
Exchanges are the target of choice for hackers. Rather than attempt to execute a 51 percent attack on a blockchain — a very difficult task — hackers prefer to target centralized cryptocurrency exchanges and, in most cases, exchange users themselves.
To date, more than $1.3 billion has been stolen from cryptocurrency exchanges. Hacks targeting exchanges are also increasing in frequency — data generated by Block Genesis reveals that 61 percent of all exchange hacks have occurred since January 2018.
An exchange hack can result in the loss of a significant amount of cryptocurrency, which may or may not be recovered. Losing crypto on an exchange has far-reaching consequences, however — what does a crypto exchange hack mean for your tax report?
Cryptocurrency Exchange Hacks and Taxation
The relatively new status of cryptocurrency as a mechanism of value storage and transfer combined with ever-evolving regulatory stances on the taxation of cryptocurrency trades makes determining the tax impact of a cryptocurrency hack a complex process.
In some cases, cryptocurrency lost in an exchange hack or fraudulent scheme can be deductible in certain scenarios. In the United States, loss from a cryptocurrency exchange hack can be defined as “theft loss” or a “capital loss,” depending on the specific circumstances of the hack.
The US Internal Revenue Service treats cryptocurrencies such as Bitcoin as “convertible virtual currencies.” This means that an exchange hack typically meets the definition of “criminal appropriation of another’s property,” allowing individuals that have been affected by an exchange hack to deduct the loss from capital assets. This deduction, however, is limited to $3,000 per year, which could potentially leave investors that lost larger amounts in an exchange hack out of luck.
Exchange Hacks and Tax in Australia
The United States has a relatively forward-leaning taxation position in regards to cryptocurrency and exchange hacks. The loss of cryptocurrency through exchange hacks in Australia can be a little bit more complicated.
Under Australian tax law, traders and holders may be able to claim a capital loss in two specific situations:
- The private key to a cryptocurrency wallet is lost
- Cryptocurrency is stolen
The ATO appears to understand the complex nature of cryptocurrencies in this regard, but it’s important to note that capital or trading loss claims made on these criteria must be submitted with extensive evidence to support it.
In the case of a lost private key, the owner must provide the dates when the private key was acquired and lost, and the wallet address itself, along with proof that the wallet was indeed owned by the claimant.
In the case of a cryptocurrency exchange hack, the claimant must be able to verify that they own the wallet on the exchange that was hacked. This can be proven relatively easily for exchanges that allow users to link identity information. In the case of no-KYC exchanges, claimants will need to prove that they own the wallet in question by providing transactions that link the wallet to their identity.
Why It’s Important to Engage a Professional if You’ve Been Hacked
Keeping track of your cryptocurrency trades in order to file a tax report can be a relatively simple process when using crypto tax software, but the added complexity of a cryptocurrency exchange hack loss claim in Australia can turn a simple report into a major headache.
If you’ve become the victim of a cryptocurrency exchange hack, it’s important to investigate all of the options available to you that could potentially help you recover your capital. Whether or not you qualify for a capital loss deduction for the hack can be an extremely complex determination.
It’s best engage the services of a professional tax accounting firm that specializes in cryptocurrency tax in Australia to ensure you’ve got everything straight before you submit your crypto tax return. If you’re looking for tax guidance on how to move forward after a cryptocurrency exchange hack, get in touch with Fullstack today.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.