Last updated: 25/01/2019
Unfortunately, many people held crypto on the Cryptopia exchange while it was hacked. This article outlines the tax effect of stolen crypto should the crypto not be recovered.
If you’ve lost crypto in the recent Cryptopia hack you may be able to write off any stolen crypto for tax purposes. This could result in a tax refund (or reduce your existing tax to pay).
If you purchased cryptocurrency for the intention of disposal, the gains/losses are treated as taxable income. IRD requires taxpayers to calculate their trading profits and declare their cryptocurrency activity through an income tax return.
From a trader’s perspective, cryptocurrency held for trading is consider “trading stock”. Therefore, it is subject to the trading stock rules as defined by the Income Tax Act 2007.
At year-end, any unsold cryptocurrency is recorded as closing stock (income). If you lost crypto during the hack, you may not have any closing stock, but still have a tax-deductible purchase cost from the original acquisition.
John purchases 2 ABC tokens for $2,000 from Cryptopia. He sells 1 ABC for $1,200 (and takes the profits off Cryptopia into a separate bank account). The remaining 1 ABC stays on the exchange and is stolen in the hack. John purchased the original 1 ABC token for $1,000 and its market value when stolen was $1,200.
What are the Tax Implications?
John’s activity can be summarised as follows:
|Sales||$1,200||the sale of 1 ABC at the time of sale|
|Purchases||$2,000||the original purchase of 2 ABC for $2,000|
|Closing Stock||$0||none – because it was stolen|
|Gross Profit/(Loss)||($800)||loss – able to be offset against other income|
In summary, John has made a profit of $200 on the disposal of his 1 ABC (sold for $1,200 and purchased for $1,000) but has then lost $1,000 (his remaining 1 ABC token) in the hack. Therefore $200 – $1,000 = -$800 overall loss.
…But, John Actually Lost $1,200
The market value of the ABC at the time it was stolen was $1,200. For tax purposes, John’s loss is $800 (as outlined above), however, his actual financial loss is $1,200. This was the market value of the 1 ABC token at the time.
The full $1,200 is not tax deductible for two reasons:
- The $200 increase from the cost of $1,000 to $1,200 has not been recorded as taxable income. Therefore, it cannot be a taxable loss as it has not been realised for tax purposes.
- The $200 profit on the disposal of the first 1 ABC is considered which reduces the overall tax loss.
For information on non-taxable cryptocurrency gains, please see our other article.
AgBiz Accountants are Chartered Accountants who prepare financial statements and income tax returns that involve cryptocurrency. They provide personalised tax advice to your individual circumstances. Contact Tim Doyle (email@example.com) for a no obligation call or meeting to discuss any crypto tax or accounting questions.
Disclaimer: The above references an opinion and has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. The opinions expressed by the author do not represent the opinion of BitPrime.
Last updated: 25/01/2019