Principal Issues: What is the tax treatment of a loss suffered by a taxpayer who loses access to their Bitcoin when the centralized exchange platform is victim of a fraud and when could such loss be claimed
Position: The tax treatment of a loss and the moment that the loss could be claimed will depend on the facts of each situation and on the terms and conditions between the centralized exchange platform and the taxpayer.
FEDERAL TAX ROUNDTABLE, NOVEMBER 2, 2023
APFF CONFERENCE 2023
9. Cryptocurrency loss
Here is a hypothetical scenario in which Ms. Y bought a bitcoin on a centralized exchange platform for $40,000, which she paid in cash. She wished to use her bitcoin to ultimately buy products online. She kept her bitcoin carefully on the centralized exchange platform. In the spring of 2023, the centralized exchange platform was the victim of fraud and Ms. Y lost access to her Bitcoin.
Question to the CRA
For the situation presented, we wish to know what the tax treatment of the loss would be and when the loss could be claimed by the taxpayer.
CRA Response
Where a taxpayer holds a cryptocurrency through a centralized exchange platform and the platform is the victim of fraud or theft that results in a taxpayer losing access to the cryptocurrency, the tax consequences to the taxpayer resulting from the fraud or theft will depend on several factors. First, it may be necessary to determine whether the taxpayer held the cryptocurrency in the course of a business or as a capital investment. In addition, it will generally be necessary to characterize the existing contractual relationship between the exchange platform and the taxpayer. The circumstances and contractual arrangement between the exchange platform and the taxpayer will generally determine the ownership of the cryptocurrency that was the subject of the fraud or theft and the platform's liability to the taxpayer as a result of the fraud or theft. Those issues can only be determined by analyzing the terms and conditions of use of the exchange platform, or similar documents, and the facts of each situation.
For example, if the exchange acts as custodian of the cryptocurrency on behalf of the taxpayer, the loss suffered as a result of the fraud or theft will generally be attributed to the taxpayer. Conversely, if it is established that, under the arrangement between the taxpayer and the exchange platform, the latter is the owner of the cryptocurrency that was the subject of the fraud or theft, it will be necessary to determine the nature of the taxpayer's rights under her contractual relationship with the exchange platform and her potential loss in order to determine whether that loss is deductible.
It should be noted that the mere holding of cryptocurrency for future use, i.e., for the purchase of products online, does not make the cryptocurrency personal-use property.
A loss realized as a result of fraud or theft is usually taken into account in computing income in the year in which the loss is recognized. However, where the taxpayer has received compensation for capital property unlawfully taken, the specific rules of subsection 44(2) apply to determine the time of disposition.
Yara Barrak
November 2, 2023
2023-098291