With the rise of crypto scams, many investors are left wondering if they can claim losses on these fraudulent activities. The answer varies depending on the country and the type of scam involved. In most cases, strong documentation and adherence to local tax rules are crucial for a successful claim.

Crypto scams have become increasingly sophisticated and costly. In 2024 alone, these scams drained approximately $9.9 billion, according to Chainalysis. Whether it’s rug pulls, phishing attacks, or fake platforms, the financial damage is significant.

So, the burning question remains: Can investors claim losses on crypto scams?

The classification of the loss, whether it is categorized as theft, fraud, or investment, plays a crucial role in determining the eligibility for claiming losses. Different types of scams are treated differently for tax purposes, impacting the amount and manner in which losses can be claimed.

Types of Crypto Scams and Tax Treatment

1. Rug Pulls and Phishing Attacks: These are often classified as theft. If an individual’s wallet is drained after falling victim to a phishing attack or investing in a fraudulent token project, it is typically considered theft. In some jurisdictions, theft losses may be deductible if evidence of the crime is provided.

2. Ponzi Schemes: Ponzi schemes are often treated as investment losses. Investors may be eligible for special relief in certain cases, allowing for larger deductions than standard capital loss rules.

3. Fake Platforms and Investment Scams: Depositing crypto into deceptive platforms or falling for online investment schemes is often viewed as an investment loss rather than theft. Claiming a capital loss with an annual deduction cap may be possible in such instances.

Claiming Losses on Crypto Scams by Country

United States

In the United States, the rules around claiming losses on crypto scams have become more stringent. Victims of crypto theft are no longer able to report stolen crypto as a theft loss on their taxes, except in cases of federally declared disasters. Most losses are treated as capital losses with a deduction limit of $3,000 per year.

Special relief may be available for losses incurred due to Ponzi schemes under certain circumstances.

United Kingdom

HMRC in the UK does not recognize stolen crypto as a disposal event, making it challenging to claim capital losses on stolen or hacked crypto. However, a negligible value claim may be possible for worthless assets.

Canada

Individual investors in Canada can usually claim losses on stolen or hacked crypto as capital losses. Crypto businesses can treat losses as deductible business expenses.

Australia

Australian investors can claim capital losses on stolen or lost crypto if the loss is permanent and well-documented. Crypto businesses can deduct losses as trading stock.

European Union

Most EU countries do not allow individual investors to deduct losses from stolen or lost crypto unless the asset is disposed of.

India

In India, crypto losses are not tax-deductible, regardless of the circumstances.

Your Best Chance at Deducting Crypto Scam Losses

Building a strong case with detailed documentation is crucial for maximizing the chances of successfully claiming losses on crypto scams. Keeping thorough records, including wallet addresses, chat transcripts, and timelines of events, is essential.

Recovering Stolen Crypto

While recovering stolen crypto is challenging, acting swiftly, gathering evidence, and reporting the incident to relevant authorities can increase the chances of retrieval. Professional recovery firms may also be considered, although success is not guaranteed.

Final Thoughts

Although claiming losses on crypto scams can be complex and challenging, taking proactive steps to document the incident and seek professional advice can help investors navigate the process effectively. Protecting oneself against future scams and staying informed about tax regulations is key to safeguarding investments in the crypto space.