On February 21, 2025, Bybit, a cryptocurrency exchange, was the victim of an attack that saw 400,000 Ethereum stolen from their offline storage system. At that time, the total amount stolen amounted to roughly $1.5 billion CAD. While this raises questions about the security of cryptocurrency assets held by crypto exchanges, there are tax consequences that individuals should be aware of when dealing with stolen assets.
This article will explore how the Income Tax Act (the "Tax Act") treats stolen property and how a crypto exchange operating in Canada would account for the stolen property from a tax perspective.
Deferral of Capital Gains
When a capital property is stolen, there is an involuntary disposition that results in the realization of capital gains. Subsection 44(1) of the Tax Act allows a deferral of the capital gains that are realized when the property is stolen. This provision will apply when an amount becomes receivable as proceeds of disposition of capital property.
For instance, when the taxpayer receives compensation for the stolen asset, this amount is deemed to be proceeds of disposition. However, if compensation is not received, then section 44(1) will not be applicable. In these circumstances, a capital loss can be claimed under section 40 of the Tax Act, if the asset was held as an investment.
Moreover, replacement property must be acquired by the later of the end of the second taxation following the initial year and 24 months after the end of the initial year. "Replacement property" is specifically defined in subsection 44(5) of the Tax Act. Generally, this property will need to be similar in use or the same as the former property.
In the case of stolen crypto assets compensated by Bybit, if the stolen assets are replaced and meet the definition of replacement property, an election may be filed by the taxpayer to defer the capital gains that would have otherwise been realized. If the asset has not been replaced in the same year as the disposition and is instead replaced in a subsequent year, an election may still be made.
The acquisition of replacement property is a requirement for the application of section 44(1). Thus, if the taxpayer has not acquired replacement property in the time periods prescribed by the Tax Act, then the taxpayer will not be able to elect to defer the realization of capital gains but will still be able to realize a capital loss.
Tax Implications for the Crypto Exchange
Bybit is a cryptocurrency trading platform or exchange incorporated in the British Virgin Islands. While in the past Bybit had a presence in Ontario as an unregistered cryptocurrency asset trading platform, it has since ceased its operations in Ontario and Canada. As a foreign entity, Canada's taxation system would not subject Bybit to domestic Canadian taxation. Thus, the company would not be able to benefit from any deductions that are available to Canadian resident corporations.
However, in general, the profit that is generated by a cryptocurrency exchange, such as Bybit, is taxed as business income. Cryptocurrency exchanges may hold crypto assets to sell directly to their customers in the ordinary course of their business. Thus, when those crypto assets are stolen, they create non-capital losses. These losses are normally deductible only if the loss is an inherent risk of carrying on business and the loss is reasonably incidental to the normal income-earning activities of the business.
In other words, there needs to be a connection between the loss and the business activities. The CRA has specified that theft by strangers is an inherent risk for most businesses. Thus, if the loss is reasonably incidental to the income-earning activities of the crypto exchange's business, then those losses will normally be deductible.
Pro Tax Tip
While having property stolen is an unfortunate event, losses that may be claimed under these circumstances still have tax value and benefits. The advantage of having losses is that under the Tax Act, it is possible to reduce your overall tax payable by utilizing these losses.
While a capital gain or business income must be accounted for in the year that they arise, losses can be "saved" and used in previous or following years. Specifically, non-capital losses can be carried forward 20 years and back three years, while net capital losses can be carried forward indefinitely and back three years. Therefore, it is equally important to account for all losses in your investments and businesses, as they can be used to reduce the overall tax burden of future investments or income.
FAQ
How will I know if the disposition or sale of my cryptocurrency asset will result in business income or capital gains?
When making this determination, the CRA treats crypto assets similarly to the assets of a corporation. Typically, the taxpayer's conduct and intentions will be indicators of whether a transaction will attract business income or capital gains. Factors such as the frequency of transactions, period of ownership, knowledge of the market, past history of similar transactions and others are considered. Business income will also arise when the transaction can be characterized as an adventure or concern in the nature of trade, which would be an infrequent or isolated transaction.
What is the difference between capital and non-capital loss?
A capital loss occurs when capital property is disposed of for proceeds below the adjusted cost base (often referred to as the ACB) of the property. When these losses occur, they are used to calculate net capital gains, which are the taxpayer's capital gains minus any allowable capital losses. Non-capital losses are losses typically from business, property and an office or employment. The key difference is that non-capital losses are deductible from all sources of the taxpayer's income, while capital losses are only relevant to the extent that the taxpayer has capital gains.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
