Can I Write Off A Crypto Scam Loss For Tax Purposes?

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Is Being Scammed Tax Deductible?

Falling victim to a crypto scam can be devastating for the victim, many of whom lose their life savings to the fraudsters.

Most people who’ve lost money to fake crypto investing schemes are desperate to know if there’s anything they can do to recover their money.

While it’s extremely difficult to recover stolen cryptocurrency from the scam groups, it’s important to explore how such losses are treated for tax purposes in the UK in case there’s any way of recouping a portion of the losses.

Loss due to fraud and scams

Many common crypto scams involve victims transferring money from their bank account to a legitimate crypto exchange where it’s converted into cryptocurrency.

This is usually carried out under the direction of the scammer, who will then give the victim a crypto wallet address to transfer their coins to, under the guise of it being an investment platform where they stand to make impressive returns.

But the platform will be fake and the coins will be transferred to a wallet controlled by the scammer where it’ll be moved on and laundered.

However, despite your coins being stolen and no longer in your control, HMRC usually does not consider this theft to be a disposal.

Technically you still own the asset and you have the right to recover it. In fact, there are several ways you can try to do this and specialist crypto recovery companies set up to help.

Negligible value claim for scammed losses

However, if you can convince HMRC that you no longer have access to your coins you may be able to make what’s known as a negligible value claim.

This is applicable when an asset that you own has become worth next to nothing while it’s been in your possession, and this applies to cases of theft and fraud as well.

If you can prove to HMRC that the asset no longer has any value, in this case your stolen crypto tokens, you may be able to realise a loss and reduce your Capital Gains Tax liability.

Stolen coins still have value

It’s important to note that even though in your mind your cryptocurrency has been stolen and you no longer have any control over it, HMRC still judges it to have value, wherever it’s being held.

Therefore, securing a negligible value outcome is not straightforward if HMRC decides that the asset is still worth something, even if it’s in the hands of scammers.

Applications to make a negligible value claim need to be made in writing to your tax office or by entering a negligible value when you complete your annual tax return.

Although it’s possible to do this yourself, it may be worthwhile using a tax professional to help you to ensure your case is presented in the right way.

HMRC’s approach to the theft of cryptoassets

Broadening the issue out to the theft of cryptoassets in general, rather than just scams, HMRC has issued guidance in its manual headed ‘Cryptoassets for individuals: Capital Gains Tax: being defrauded’.

Here, the position seems clear – if you’re defrauded there is little you can do to reclaim the loss via Capital Gains Tax.

HMRC says that it “does not consider theft to be a disposal, as the individual still owns the stolen asset and has the right to recover it”.

However, if you’ve been caught up in a scheme where you’ve bought tokens and actually received them but they then become worthless, you might be able to make a negligible value claim.

If you need advice and help navigating the world of crypto and avoiding scams, then check out the services we offer.

Related post: Crypto scams help and resources