Tax Losses From Theft And Embezzlement Of Bitcoin & Other Assets— A Canadian Tax Lawyer Analysis

Introduction — Taxation of Trading Stocks and Cryptocurrency

Taxpayers, particularly those with valuable inventory or capital assets, can be crippled through the actions of opportunistic thievesand fraudsters. As the use of technology continues to proliferate, intangible assets are increasingly also subject to these same risks.Bloomberg recently reported that theft by hackers of cryptocurrencies, such as Bitcoin and Ether, has become an annual USD $200 million business. The tax implications of such an unfortunate occurrence are understandably often an afterthought, however obtaining the best tax result can help lessen the blow. There are no special provisions in the Income Tax Act that deal specifically with losses suffered through theft or fraud. Any available tax deductions are subject to the general principles relating to the taxation of income from business or property and income earned on account of capital. CRA has published policy to explain how these principles apply to losses from theft or fraud. Our Canadian tax lawyers are experts on the Income Tax Act and can help you obtain tax relief if you are the victim of Bitcoin or other theft, fraud or embezzlement.

Loss of Business Inventory or Cash through Theft — CRA Policy and Case Law

Courts have long held that losses suffered as a result of theft, fraud or embezzlement are generally deductible in accordance with the general limitation contained in paragraph 18(1)(a) of the Income Tax Act, namely that deductions are available to the extent they are incurred to earn income from a business. Much of CRA policy and case law concerning this topic focuses on the connection between the theft or embezzlement and the operations of the business. CRA's Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime, contains CRA's published position on the tax treatment of losses of trading assets, such as inventory or cash, that occur as a result of theft or embezzlement. Under paragraph 1.33 of S3-F9-C1, CRA writes that losses that arise from theft or embezzlement are generally deductible so long as:

such losses are an inherent risk of carrying on the business; and the loss is reasonably incidental to the normal income-earning activities of the business. This policy does not allow for a loss of inventory or cash to be deducted twice and it only allows for out-of-pocket losses to be deducted: unrealized profits due to the theft or embezzlement are not...