For unlucky crypto investors looking to turn lemons into lemonade, it turns out that digital assets lost during an exploit or hack can potentially be claimed as a tax loss, provided you live in the correct country, experts told Cointelegraph.
After the news that over 8,000 Solana wallets were compromised and approximately $8 million worth of crypto was stolen due to a security breach in the network of wallet provider Web3 Slope, this may be some much-needed consolation.
Solana’s trick and its possible tax consequences: a thread https://t.co/JnYMrkB8qJ
— Crypto Tax Calculator (@CryptoTaxHQ) August 3, 2022
In correspondence with Cointelegraph, Shane Brunette, CEO of Australia-based CryptoTaxCalculator, confirmed that cryptocurrency lost through a hack or exploit could be reported as a loss for tax purposes in certain jurisdictions.
“This means that the original amount you paid for the assets can be used to offset other capital gains.”
When asked if similar provisions exist in tax jurisdictions other than Australia, the country in which the tax software provider is located, Brunette responded:
“Many countries have a provision to allow this type of tax deduction […] however, you should work closely with a local tax professional and ensure you retain adequate proof of loss.”
Danny Talwar, Head of Taxation at Koinly, confirmed the same with Cointelegraph, emphasizing, however, that in Australia, one must show evidence that the lost crypto was in their control at the time it was stolen.
“To claim a capital loss from hacked crypto, you will need to show evidence to the Australian Taxation Office (ATO) that the crypto was lost and was under your control.”
Talwar also stated that it was critical that the tax authority have sufficient evidence that cryptocurrencies cannot be recovered, suggesting the use of blockchain exploration tools such as Etherscan and Solscan to legitimize evidence about the hacker’s destination address, which can also provide proof of a large pool of hacked funds.
Under Australian tax laws, any evidence of a hack must also include the dates private keys were acquired or lost and all associated wallet addresses.
Related: Solana Wallets ‘Compromised and Abandoned’ as Users Warn of Fraudulent Fixes
Unfortunately, for US-based crypto investors claiming hacked crypto is a tax loss is no longer possible due to the tax reform introduced in 2017, according to a CryptoTaxCalculator blog post.
For those living in the UK and Canada, things are a bit more complicated, but it is possible to file a tax loss claim if investors are willing to follow the unique steps set out by each country’s tax office.
Roughly $2.6 billion in digital assets have been lost to hackers and nefarious actors this year alone, with cross-chain bridging attacks accounting for 69% of the total amount lost.