Cryptocurrency has become an extremely popular digital currency all over the world. Because of this, crypto scams have become more creative & widespread, as well. But, just because you got scammed out of some money on cryptocurrency, does that mean you’ll have to pay taxes on the money you lost? Maybe not, but it all depends on the type of scam you fell for and the jurisdiction where you lost your money.There are many types of crypto scams. Let’s explore some of the most popular cons.
Phishing Scams
Phishing scams have been around for a long time, and they’ve been duping people out of their money since long before crypto was even a thing. These scams involve imposters pretending to be legitimate entities, such as a crypto exchange. They lure the victim into a false sense of security, then trick the victim into giving out some of their personal information. Their whole intention is to obtain private information so that they can gain access to their victims’ wallets & crypto accounts.
Fake Crypto Trading via WhatsApp & Telegram
The scam victim gets added to a random WhatsApp or Telegram group. Group members ask the victim to install the app XYZABC through their own link. The victim is then encouraged to participate in crypto trading in large amounts in the app. The victim would see their investments sore and the value quadruple overnight. They are then encouraged to invest even more money through the app. But, when the victim tries to withdraw any of their investments or profits, it’s never honored. Usually these scams operate from China, Hong Kong, or Myanmar.
Giveaway Scams
Giveaway scams work much the same way. Scammers entice victims with offers that appear to be once-in-a-lifetime opportunities. These fraudulent schemes may promise immediate returns, like airdrops, luring the unsuspecting individuals into transferring their cryptocurrencies or fiat. It just goes to prove the old saying, “If it seems too good to be true, that’s probably because it is.”
Rug Pulls
Rug pulls are relatively recent and they’ve become particularly prevalent within the decentralized finance space, or DeFi. In a DeFi rug pull, scammers often offer unrealistically high yield returns, but then swiftly abandon the project after collecting all the funds from investors. Fraudsters create new coins that promise extraordinary growth, but never deliver, ultimately just running off with investors’ funds. It’s critical to exercise caution when dealing with new and unestablished crypto coins, platforms, or projects. It’s also essential to always keep from disclosing your private keys to anyone. However, many of these scams appear legitimate, especially in an unregulated market. In the first quarter of 2023, the FBI reported that cyber criminals managed to steal $1.65 billion in crypto currencies. 95% of these funds were stolen from DeFi platforms.
Dusting Attacks
In the world of cryptocurrency, dust refers to a small amount of coins or tokens present in a wallet. It’s too insignificant to cover the transaction fees required for a transfer. For instance, a few hundred Satoshi’s would typically be considered as dust. Many users overlook the small amounts in their wallets. Evil actors have found ways to capitalize on this through what’s known as a dusting attack.
A dusting attack is when scammers send small amounts of dust to numerous wallet addresses. By doing so, their aim is to find out which addresses belong to the same crypto wallet. The ultimate goal is to link the dusted addresses and wallets to specific individuals or companies. If they’re successful, the scammers may then target these individuals or companies with phishing attacks or extortion threats, based on the information they obtain. It’s, therefore, crucial to be cautious and proactive about safeguarding against such attacks
If you have suffered as a victim of a crypto scam, you’re certainly not alone. It’s understandable that people would hope their losses are treated as a capital loss. If they could hopefully mitigate the impact on their tax bill, it would be some sort of silver lining in this horrible situation. However, dealing with the tax implications of crypto scams is not as simple as it may seem.
Are coins lost in a crypto scam subject to taxation?
Fortunately, if you lose your crypto assets due to theft, it won’t be considered taxable. Meaning, you won’t be liable to pay capital gains tax on any notional “gains” resulting from the difference in value between the day your coins were lost to the day they were acquired. This may seem obvious and fair, but as many crypto investors have learned, the income tax department tends to seize any opportunity to apply taxes to cryptocurrency that they can find. But, can you claim a capital loss? A capital loss has the potential to offset a capital gain in many countries, serving as a standard tax strategy employed by many investors.This isn’t the case in India, though.
In India, income from the transfer of virtual digital assets such as crypto and NFT’s will be taxed at 30% at the end of each financial year. No deduction, except the cost of acquisition, will be allowed while reporting income from the transfer of digital assets. This means any capital lost from a crypto scam won’t be allowed as a deduction. So, in terms of tax, the impact of crypto lost due to a scam is to be treated as a write off, resulting in no recognized gain or loss. The stolen asset is considered as simply gone. There are no capital gains or losses attributed to it. Stolen crypto is treated differently, depending on the jurisdiction where you reside. It’s important to examine the policies of different tax offices worldwide to determine if they permit the claiming of crypto scams as a capital loss.
It’s very important to be careful when you visit crypto exchanges around the world. Manyi are legit, but some can be dangerous scammers waiting in the shadows, hoping to steal your hard-earned money. Some countries, like Australia and Canada, have options to soften the blow from losses due to crypto scams. Some other countries, like the United States and the United Kingdom, won’t allow you to claim the loss on your taxes. So, be very careful who you choose to do business with!
