Taxation of Money Lost in a Crypto Scam in India 2024
Crypto scams are very widespread. From phishing to rug pulls to fake crypto trading scam to crypto giveaway scams, billions of dollars are annually lost by investors to fraudulent crypto schemes. If you have experienced the misfortune of losing money to a crypto scam, you may be concerned about the implications for your tax liability. In this article, we will delve into the essential details regarding taxes and crypto scams in India. This includes exploring the possibility of treating your lost coins as a capital loss and utilizing it to counterbalance your gains.
Table of Contents
What is a crypto scam?
There are many types of crypto scams some of most prevalent are as follows:
Phishing scams
Fake crypto trading scam via WhatsApp & Telegram groups
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Giveaway scams
Giveaway scams work similarly. Scammers entice victims with enticing offers that appear to be once-in-a-lifetime opportunities. These fraudulent schemes may promise immediate returns, such as airdrops, luring unsuspecting individuals into transfer their cryptocurrencies or fiat.
Rug pulls
Dusting attacks
Dusting attacks, while not new, are growing in popularity and should be highlighted to ensure awareness and prevention. In the realm of cryptocurrencies, "dust" refers to a minuscule amount of coins or tokens present in a wallet that is too insignificant to cover the transaction fees required for transfer. For instance, a few hundred Satoshis would typically be considered as dust. Many users tend to overlook these small amounts in their wallets, and malicious actors have capitalized on this through what is known as a dusting attack.
A dusting attack involves scammers sending small amounts of dust to numerous wallet addresses. By doing so, the scammers aim to deduce which addresses belong to the same crypto wallet. The ultimate objective is to link the dusted addresses and wallets to specific individuals or companies. If successful, the scammers may then target these individuals or companies with phishing attacks or extortion threats based on the obtained information. It is therefore crucial to be cautious and proactive in safeguarding against such attacks.
It is important to recognize that if you have unfortunately become a victim of a crypto scam, you are not alone. It is understandable that you might hope to treat it as a capital loss to potentially mitigate the impact on your tax bill, seeking a small silver lining in the situation. However, dealing with the tax implications of crypto scams is not as straightforward 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 a taxable event. 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 and the day they were acquired. This approach may seem obvious and fair, but as experienced by crypto investors, the income tax department tends to seize opportunities to apply taxes to cryptocurrency at every opportunity.
However, in the case of victims who have lost their assets entirely due to crypto hacks, the larger question arises: Can they claim a capital loss? A capital loss has the potential to offset a capital gain in many countries (except India), serving as a standard tax strategy employed by many investors.
Is it possible to declare crypto lost in a scam as a capital loss?
In India, Income from the transfer of virtual digital assets such as crypto and NFTs 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 loss due to crypto lost in a scam won't be allowed as deduction. So in terms of taxation, the impact of crypto lost due to scam is that you treat it as a write-off, resulting in NO recognized gain or loss. The stolen asset is considered as simply gone, and there are no capital gains or losses attributed to it.
However, it is important to note that the treatment of stolen crypto varies depending on the jurisdiction in which you reside. It is worthwhile to examine the policies of different tax offices worldwide to determine whether they permit the claiming of crypto scams as a capital loss.
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Conclusion
Crypto scams, including phishing scams and rug pulls, are widespread occurrences. In the event of stolen crypto, you generally won't be subject to taxation on the losses incurred. In India, no deduction, except the cost of acquisition, is allowed while reporting income from the transfer of digital assets. This means any loss due to crypto lost in a scam won't be allowed as deduction.
The possibility of claiming stolen crypto as a capital loss is highly contingent upon the regulations of your jurisdiction. The eligibility to claim such losses varies based on the country or region in which you reside. For example - in the United States, it is not possible to claim stolen crypto as a capital loss. Similarly, in the United Kingdom, claiming stolen crypto as a capital loss is not allowed. On the other hand, in Australia, you have the ability to claim stolen crypto as a capital loss. In Canada, there is a possibility that you might be able to claim stolen crypto as a capital loss, although the specific circumstances and regulations may vary.
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