Lost crypto to fraud or hacking? You may qualify for a tax deduction!

Are you one of the unfortunate ones who have lost funds or cryptocurrency due to fraud, "rug pulls," or similar incidents? You are not alone. However, you can reduce your loss by claiming a deduction for your loss on your tax return. The main requirement is that the claim is considered lost. In this blog, we’ll outline how to proceed.

How does deduction for losses on cryptocurrency work?

If you have lost money due to fraud, the loss may be considered permanent, and you can claim a deduction for it on your tax return. This means that if, for instance, you have been tricked into giving up your security key (“seed words”) or access to your account on your cryptocurrency platform or digital wallet, resulting in a loss, you may reduce your tax bill by claiming a deduction for the loss.

A loss deduction can help minimize your total economic loss; however, certain requirements must be met for the deduction to be approved.

The main requirements for claiming a deduction for crypto fraud or hacking

To claim a deduction for cryptocurrency loss, you must be able to prove that the loss is real and permanent. This entails:

• The loss must be permanent – You must show that there is no realistic possibility of recovering your funds. For instance, this could be that the fraudsters cannot be traced, the exchanges you traded on have closed, your wallet has been emptied, the funds transferred to an address where the owner cannot be identified, etc.
• Documentation must be provided – Solid documentation of the loss and its size is required to qualify for a deduction. This includes transaction data showing the cash flow, communication with the fraudsters or exchanges, police reports, and other relevant information confirming the loss is final and permanent. The more detailed the documentation, the stronger your case is with the Tax Administration.
• Evidence assessments – The Tax Administration may require you to present evidence that shows that the loss occurred because of fraud. This can be challenging since cryptocurrency can be difficult to trace, and many crypto scammers operate in a legal “grey area.”

Steps you should take to secure a deduction

1. Report the fraud to the police: One of the first steps you should take is to report the fraud to the police. This is important for the investigation and documentation for the Tax Administration. The police report enhances the credibility of your claim and demonstrates that you have taken appropriate measures to recover the funds. It is beneficial if the information in the police report aligns with the facts you submit to the Tax Administration when you claim the deduction.
2. Obtain an overview of the loss: Gather all available documentation, such as transaction history from crypto exchanges or wallets, communications with the fraudsters, and other information describing how the fraud occurred. Save screenshots, emails, and other evidence that can help substantiate your case. Calculating the size of the loss can be demanding, and you should spend time calculating it accurately and finding documentation that supports the amount.
3. Update your Tax Return: Once you have all the documentation, report the loss on your tax return and attach the gathered documentation. You should also include an attachment listing all relevant facts about the fraud and how it occurred. Remember, the deduction can only be claimed for losses that are considered permanent.
   
   

What are the challenges you may face?

A common challenge is that the Tax Administration tends to be strict when approving such deductions. The approval process can be lengthy, often requiring multiple rounds to collect all necessary documentation. This procedure may appear bureaucratic, and it can be advantageous to seek professional assistance, particularly if you are uncertain about the appropriate steps to take.

Be proactive and protect your future investments

Losing money to crypto fraud can be demanding, but by taking the right steps you can at least reduce some of the loss through tax deductions. At the same time, it is important to be extra cautious with future crypto investments. The crypto market is still relatively unregulated, and many dishonest players exploit this lack of control. Make sure to conduct thorough research before investing and use reliable exchanges and platforms. If you receive calls from people offering to help you get rich with cryptocurrency or if you are considering larger investments in tokens or minting of NFTs, we recommend seeking professional assistance before proceeding.

Have you been a victim of crypto fraud or hacking and need help?

• Remember to act quickly.
• Secure all documentation.
• Be thorough with your tax return.