September 30, 2022

For unlucky crypto investors looking to turn lemons into lemonade — it turns out digital assets lost during an exploit or hack can potentially be claimed as a tax loss, provided you live in the right country, experts told Cointelegraph .

Following the news that more than 8,000 Solana wallets had been hacked and that one is appreciated $8 million in crypto was stolen due to a security breach in wallet provider Web3 Slope’s network, that might be some much-needed consolation.

In a correspondence with Cointelegraph, Shane Brunette, CEO of Australia-based CryptoTaxCalculator confirmed that losing crypto through a hack or exploit could be reported as a loss for tax purposes in some jurisdictions.

“This means that the initial amount you paid for the assets can be used to offset other capital gains.”

When asked if similar provisions exist in tax jurisdictions other than Australia, the country in which tax software provider Brunette is based, she said:

“Many countries have a provision that allows these types of tax deductions […] However, you should work closely with a local tax professional and ensure that you retain adequate evidence of the loss.”

Danny Talwar, Head of Tax at Koinly confirmed as much to Cointelegraph, however, stressing that in Australia, it must be proven that the lost crypto was under their control at the time it was stolen.

“To claim capital loss for compromised encryption, you will need to prove to the Australian Taxation Office (ATO) that the encryption was lost and under your control.”

Talwar also said it is critical that the tax authority has enough evidence that the encryption is not recoverable, pointing to the use of blockchain exploration tools such as Etherscan and Solscan for legitimate evidence about the hacker’s destination address – which can also prove a large pool of hacked funds.

According to Australian tax laws, any proof of hacking must also include dates of acquisition or loss of private keys and all associated wallet addresses.

Related: Solana wallets ‘hacked and abandoned’ as users warned of scam solutions

Unfortunately, for US-based crypto investors, claiming hacked cryptocurrencies as a tax loss is no longer possible due to the tax reform introduced in 2017, according to a CryptoTaxCalculator blog post.

For those living in the UK and Canada, things are a bit more complicated, but claiming a tax loss is possible if investors are willing to follow the unique steps set out by each country’s tax authority.

Around $2.6 billion in digital assets have been lost to hackers and malicious actors this year alone, with attacks on multi-chain bridges accounting for 69% of the total amount lost.