CAD$1.5 Billion of Ethereum Stolen: CRA’s Tax Treatment of Stolen Property

On February 21, 2025, Bybit, a cryptocurrency exchange, fell victim to a cyber attack resulting in the theft of 400,000 Ethereum, totaling approximately $1.5 billion CAD. The incident not only raises concerns about the security of digital assets held by crypto exchanges but also brings to light the various tax implications associated with stolen property, particularly in the realm of cryptocurrencies.

Under the Income Tax Act, stolen property triggers an involuntary disposition leading to the realization of capital gains. Section 44(1) of the Tax Act permits deferral of capital gains in cases where the stolen property has been compensated for. However, if compensation is not received, taxpayers can claim a capital loss under section 40 of the Tax Act, provided the asset was held for investment purposes. Additionally, replacement property must be acquired within specific timeframes to qualify for deferred capital gains treatment.

Regarding the tax treatment of stolen crypto assets within a Canadian crypto exchange like Bybit, it’s important to note that as a foreign entity incorporated in the British Virgin Islands, Bybit is not subject to domestic Canadian taxation. Nevertheless, profits generated by crypto exchanges are typically taxed as business income. In the event of stolen crypto assets, resulting in non-capital losses, such losses may be deductible if they are inherent risks of the business and reasonably related to its income-earning activities.

While the theft of property remains a distressing occurrence, the tax laws provide some solace by allowing for the deduction of losses. These losses, whether capital losses or non-capital losses, can be utilized to reduce overall tax liabilities. Non-capital losses can be carried forward up to 20 years and back three years, while net capital losses have indefinite carry-forward capabilities, supporting the importance of accounting for losses to offset future tax obligations.

Determining whether a transaction involving the sale of cryptocurrency assets results in business income or capital gains depends on several factors, including the taxpayer’s conduct, intentions, frequency of transactions, market knowledge, and transaction history. The Canada Revenue Agency (CRA) assesses these factors when distinguishing between business income and capital gains, with business income being recognized particularly in transactions deemed as adventures or concerns of trade.

In conclusion, the theft of cryptocurrencies posing tax implications sheds light on the complexities and considerations involved in dealing with stolen property, particularly in the digital realm. Understanding the tax treatments and implications associated with stolen property is crucial for individuals and entities alike to navigate the ever-evolving landscape of digital assets and taxation.