Last Updated: September 18, 2023
In some cases, lost cryptocurrency can be retrieved. One study estimates that over $4 billion worth of Bitcoin can be recovered with intelligence and asset tracing services.
For instance, if a user knows part of their private key, one could attempt to brute force the lost part; if identity theft is suspected, a forensic investigator may be involved to recover stolen assets; or if the lost crypto was from a custodial service, there might be a chance of initiating recovery.
However, UK investors need to understand that these tracing services don’t always work and, in many cases, that crypto is lost forever. In that case, it’s time to look at the HMRC’s tax implications for lost or stolen crypto.
How HMRC Classifies Lost Crypto
Lost crypto is not considered a disposal for Capital Gains Tax purposes. This means that you cannot immediately harvest the loss and claim relief – HMRC will not acknowledge your capital loss until you can prove that there is no chance of you recovering your private key and gaining access to your asset again.
The only time HMRC recognises a disposal for capital gain tax purposes is when you hold evidence that the asset is permanently lost. That’s why keeping records of all transactions and activity relating to your crypto is essential, as this provides proof if you make a negligible value claim (NVC).
Why Loss Harvesting Isn’t Immediately Possible
When you lose cryptocurrency, it still exists on the blockchain – you just don’t have the means to access it. That’s why you can’t immediately claim a capital loss. Instead, you will need to make a negligible value claim to HMRC – it treats the tokens as being disposed of and immediately re-acquired at an amount stated in the claim.
If HMRC accepts that your cryptocurrency is of negligible value, you are entitled to claim a capital loss relating to the assets you have disposed of.
An Example of Reporting Lost or Stolen Crypto
Suppose that, through arbitrage strategies, you realised £50,000 worth of capital gains in 2022. However, the private key to your crypto wallet was then lost or stolen, and you can no longer gain access to those tokens.
HMRC will still see your capital gains of £50,000 in 2022 as you sold the tokens that year. If you fail to make a negligible value claim to HMRC, you will be subject to taxes of several thousand pounds.
However, if you make a successful claim – and HMRC accepts that the tokens are of negligible value – this £50,000 capital gain can be marked as a loss. As a result, any capital gains taxes you would have been liable for related to that event will cease to exist.
The Importance of Record-Keeping
Whether your crypto was lost or stolen, keeping records of all transactions and activity relating to it is essential. Doing so provides proof if you make an NVC claim and can help with asset tracing services. It is also wise to perform regular security checks on your wallet to ensure it is secure.
In particular, if your crypto was stolen, you’ll want to file an official police report as a precaution. This way, you’ll have records of when the crime occurred to provide to HMRC if you make a negligible value claim.
How CoinTracker Can Help
CoinTracker is a leading global crypto tax software that can take the stress out of reporting your crypto taxes. This software automatically imports your data from all exchanges to help you prepare for filing your crypto taxes.
Plus, if you’ve lost any tokens, you can tag them as such, and CoinTracker will automatically include them in your taxable capital loss calculations.
If you're a lost or stolen crypto victim, there is still hope. As long as you keep records of all your activity and make the right claim, you can still get UK tax relief. To ensure everything is covered, turn to CoinTracker, starting with our comprehensive guidance on UK crypto taxes.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.