As popularity in cryptocurrency grows, tax implications start to come out of the shadows and can create real life problems for those investing. With the ATO monitoring cryptocurrency investing closely, ATO warnings have gone out to those holding cryptocurrency so they become aware of possible tax complications.

With cryptocurrency scams being the most reported type of investment scam in 2021, cryptocurrency investors often assume that these losses are tax deductible. Unfortunately, the answer to this question is not as black and white as we would hope.

Cryptocurrency scams can come in various shapes and sizes with scammers mimicking what appears as a reputable trading platform and displaying legitimate looking digital assets to lure in investors. Scammers often entice investors with a small amount of return to appear genuine, encouraging individuals to invest large sums of money before disappearing and taking investors’ money with them.   Like any investment, thorough due diligence of the asset and the associated return is vital before an investment occurs.

From a tax perspective, the consequences of any loss flows from the actual events that occurred.  If an investor owned the asset, any losses should be able to be claimed as a loss (capital or revenue depending on the investment type). Unfortunately, where no asset was ever acquired (eg the cryptocurrency didn’t really exist) it is unlikely that a capital loss can be claimed.  A revenue loss may be available if you are in the business of trading cryptocurrency, however, this may be difficult to prove.

Most cryptocurrency investors would be seeking to claim a capital loss if they were subject to a scam or other loss.  Types of evidence that would be required includes:

• Details of when the private key to the cryptocurrency was acquired and lost;
• Details of the wallet address that the private key related to;
• The costs incurred to acquire the lost or stolen cryptocurrency together with the amount of cryptocurrency in your wallet at the time you lost your private key or access;
• Being able to demonstrate that the wallet was controlled by you (ie transactions linked to your identity) and that you are in possession of the hardware that stores the wallet; and
• Transactions to the wallet from a digital currency exchange for which you hold or held a verified account or that is linked to your identity.

The world of crypto is ever evolving but rest assured the ATO is devoting resources to this new world.  The ATO has already contacted trading / brokerage houses with a view to identifying investors in cryptocurrency and the increased level of regulation will facilitate better reporting of gains and losses and hopefully reduce the level of scams impacting investors.

Should you have any further questions about cryptocurrency and its tax implications, please do not hesitate to reach out to your ESV engagement partner.