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RE: Was your Bitcoin stolen? Potential Tax Benefits for your Loss!
Maybe you can help with my question regarding this. My accounts were compromised due to a targeted exploit. I managed to get my crypto into cash in my bank account, and was able to secure my crypto accounts over a months time. I immediately sent my funds back into crypto once the accounts secured. I know this created a taxable event , but if I can prove that I sent the funds back out, do I still have to pay on the initial withdraw balance? I can prove that I sent the funds back out through paper trail of banks and coinbase. So I am hopeful that I am not screwed here. Please advise . Thanks =]
It's a tough one. This is not personal advice, but you could discuss with your tax advisor the concept of "involuntary conversion" gain deferral under Section 1033 to see if they think it applies. It's a rule that let's folks defer gains when their property is taken from them and replaced with compensation, under very specific facts/circumstances (plus they replace the old property with the proceeds). One possible crypto application is, if an exchange account was hacked and the exchange gave a person fiat as an insurance payout, that's possibly an involuntary conversion as the person didn't intend to cash out absent the theft. But your situation is less clear, as you could have transferred to another wallet, and didn't have anything stolen at the end of the day (rather you sold your asset). I would need to do a deep dive of Section 1033 regulations and cases to get comfortable with my hypothetical example qualifying (the exchange compensating an actual theft with fiat), however your example is even more ambiguous. But again you should see what your advisor thinks and if they have any other alternatives.
Thanks!
Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This article and response does not create a client relationship with the author and any reader.