The anonymity central to the very nature of cryptocurrency means that if access details are misplaced, they are often lost forever. Despite the continual development of new online wallets and marketplaces to acquire, store and transmit cryptocurrency, the potential for theft of cryptocurrency remains. Increasingly, deceptive tactics are being used to obtain the passwords (or ‘private keys’) to wallets and marketplaces.
With the end of financial year approaching, are these lost assets also forgotten for tax purposes?
The ATO’s Position
In Taxation Determination 2014/26 (TD 2014/26) the Commissioner of Federal Taxation (Commissioner) stated cryptocurrency is ‘property’ and therefore a capital gains tax (CGT) asset. A subsequent disposal of that CGT asset, by loss or theft, should in turn give rise to a capital loss.
The Commissioner has released guidance on the applicable tax treatment in these circumstances. The Commissioner notes that the ability to claim a capital loss in relation to the cryptocurrency will fall to whether the asset is regarded as being truly lost.
The term ‘lost’ infers that the item is unable to be replaced.
For the purpose of cryptocurrency, where private keys are lost they cannot be replaced and would arguably fall within this definition. In the case of holdings on marketplaces consideration should be given to the policies of those services and whether replacement assets may be provided in the event of theft.
What records do I need?
To claim a capital loss on basis that your cryptocurrency has been lost or stolen, the Commissioner notes that evidence must be provided to substantive this. To substantiate your loss you must be able to provide the Australian Taxation Office (ATO) with the following kinds of key information:
when you acquired and lost the private key;
the wallet address that the private key relates to ;
the cost you incurred to acquire the lost or stolen cryptocurrency;
the amount of cryptocurrency in your wallet at the time of losing your private key;
evidence confirming that you controlled the wallet (for example, by transactions that are linked to your identity) ;
that you are in possession of the hardware that stores the wallet (we note that this would not apply where you use web-based digital wallets); and
transactions to the wallet from a digital currency exchange for which you either hold an account, or have linked your identity.
I don’t have the correct records, what can I do?
With an increased focus being placed by the Australian Taxation Office (ATO) on tax compliance and cryptocurrency through the work of the Joint Chiefs of Global Tax Enforcement and data matching programs, taxpayers should ensure that any claims in respect of losses of these assets are accurate. The potential hit to tax revenue as a result of unsupported claims, may push the Commissioner to focus on this area more in the future.
Where records to prove ownership and substantiate losses claimed, cannot be attained to the level noted above, taxpayers should consider alternate avenues to avoid substantial penalties being imposed by the Commissioner as a result of claiming losses that cannot be sufficiently substantiated. This may include considering early engagement strategies with the ATO such as pre-lodgment reviews or private rulings.
Whilst the Commissioner’s guidance is silent on this point, it is important for taxpayers to understand the implications of insurance payouts in respect of cryptocurrency. Insurance payouts for items you've used to produce income may have to be included in your tax return. If you have received an insurance payment in respect of a cryptocurrency loss or theft, consider seeking further advice as to your tax obligations.
Personal Use Assets and Trading Stock
“Personal use assets” are CGT assets that are used or kept for personal use or enjoyment. Where the asset cost less than $10,000, the disposal of these assets is exempt from CGT. For personal use assets that cost more than $10,000 only capital losses are disregarded, meaning capital losses from the loss or theft of a personal use asset (irrespective of cost) are disregarded.
However, as we previously reported, CGT is not the sole taxing regime for cryptocurrency. Where you regularly trade in cryptocurrency, disposals will be deemed to be on revenue account. Where profits are deemed to have a revenue nature the revenue rules contained in the tax legislation will take precedence over the CGT provisions. As a result, any loss from lost or stolen cryptocurrency cannot be claimed as a capital loss but rather will represent a revenue loss.
If you would like to discuss how we might be able to help you recoup losses from stolen or lost cryptocurrency, or for general business law advice please contact our specialist team:
T +61 3 9611 0194