David Rotfleisch on How CRA Handled the Theft of CAD$1.5 billion of Ethereum: Tax Consequences for Crypto Traders, Crypto Investors and Crypto Exchanges

Bybit, a cryptocurrency exchange, experienced an incident on February 21, 2025, in which 400,000 Ethereum were taken from their offline storage system. The sum taken at that time was around $1.5 billion CAD. Even if this calls into doubt the security of cryptocurrency assets stored by cryptocurrency exchanges, people should be aware that dealing with stolen assets might have tax repercussions.

This article will discuss how stolen property is treated under the Income Tax Act (the “Tax Act”) and how a Canadian cryptocurrency exchange would report the stolen property in terms of taxes.

Capital Gains Management Through Deferral

An involuntary disposition that leads to the realization of capital profits occurs when capital property is stolen. The capital gains earned when property is stolen may be postponed under Tax Act subsection 44(1). When money is received as profits from the sale of capital property, the above provision will come into play.

It is considered proceeds of disposition, for example, when the taxpayer gets compensated for a stolen asset. Nevertheless, section 44(1) will not apply if payment is not received. Under these conditions, if the asset was held as an investment, a capital loss may be claimed under section 40 of the Tax Act.

Furthermore, replacement property must be purchased no later than 24 months from the end of the first year or the end of the second year that follows the first year. The Tax Act’s subsection 44(5) provides a precise definition of “replacement property.” Generally speaking, this property must be used similarly to or identically to the previous property.

If the stolen crypto assets are replaced and satisfy the criteria for replacement property, the taxpayer may decide to postpone the capital gains that would have been realized in the case that Bybit compensates for the stolen assets. It is still possible to make an election if the asset is replaced in a later year rather than the year of the disposition.

The implementation of section 44(1) is contingent upon the acquisition of replacement property. The taxpayer will thus not be able to choose to postpone the realization of capital gains but will still be possible to realize a capital loss if they have not purchased replacement property within the time frames specified by the Tax Act.

Understanding Tax Regulations for Cryptocurrency Exchanges

The cryptocurrency trading platform called Bybit was established in the British Virgin Islands. It has subsequently ceased all activities in Ontario and Canada, despite having once functioned as an unregistered cryptocurrency asset trading platform in Ontario. Bybit is exempt from domestic taxation in Canada as it is a foreign corporation. As a result, it cannot claim the deductions to which corporations with Canadian residences are entitled.

Typically, a cryptocurrency exchange such as Bybit’s profits are taxed as business income. As part of their daily operations, these exchanges frequently store cryptocurrency assets that they may sell directly to their clients. Non-capital losses might be the outcome of the theft of such cryptocurrency assets. The losses must be directly related to the exchange’s regular business operations in order to qualify as deductible.

The deductibility of such losses is governed by guidelines provided by the Canada Revenue Agency (CRA). The CRA states that losses that result from an inherent risk of doing business and are a reasonable incidental part of the company’s revenue-generating operations are deductible. One of the fundamental risks that most companies, including cryptocurrency exchanges, face is theft, particularly from strangers or third parties.

Consequently, a loss that is directly related to a cryptocurrency exchange’s regular business activities, such as Bybit, and involves the theft of its crypto assets, is often deductible. But under the Canadian tax system, Bybit would not be able to claim these deductions as it is not a Canadian resident entity and is not governed by Canadian tax laws.

However, the CRA’s principles provide guidance on how domestic businesses involved in comparable operations would normally handle such losses.

To sum up, Bybit is not eligible for Canadian tax deductions since it is a foreign entity; nevertheless, cryptocurrency exchanges situated in Canada may be able to claim losses from stolen assets as long as those losses are a normal and incidental element of their company activities.

Pro tax tips

Despite the fact that property theft is obviously regrettable, these losses may nonetheless qualify for significant tax advantages. The Income Tax Act of Canada allows you to strategically employ some losses to lower your overall tax obligation.

It is possible to classify losses as either capital or non-capital, depending on the kind of asset and your business operations, whether the losses are caused by theft or other causes. In most cases, a loss is categorized as non-capital if it has to do with business income or property used as inventory. By using these losses to offset other income, you can lower your taxable income.

Flexibility is a major benefit of non-capital losses. They can be carried forward for up to 20 years or carried back for up to three. This enables taxpayers to apply the losses to future years to reduce taxes as income rises or to previous years where they may have paid more taxes, thereby earning a refund.

Likewise, net capital losses resulting from the sale of capital assets, such as investments, can be carried forward indefinitely and backward for a period of three years. Long-term tax planning options are still offered by net capital losses, despite the fact that they can only be used against capital gains.

FAQ

How can I determine whether the sale or disposal of my cryptocurrency generates capital gains or business income?

In the same way that it analyzes corporate asset transactions, the Canada Revenue Agency (CRA) bases its assessment on how you manage your cryptocurrency holdings. Your intention, the number and frequency of transactions, the length of time you have owned the assets, the level of market knowledge or skill, and your track record of comparable deals are all important factors.

Even if a transaction is one-time, it could be considered business revenue if it resembles an “adventure or concern in the nature of trade.” If not, it can be seen as a capital gain.

What distinguishes a capital loss from a non-capital loss?

If you sell a capital asset, such as cryptocurrencies that you have invested in, for less than its adjusted cost base (ACB), you have suffered a capital loss. These losses can be carried forward for an infinite period of time or backward for three years, but they are only deductible against capital gains.

Non-capital losses, on the other hand, are derived from its use for business operations and can be used to offset all income sources. With the option to carry them forward for up to 20 years or back three years, they provide you more flexibility in lowering your overall tax burden.

Can theft-related cryptocurrency losses be written off?

Definitely, under specific conditions. The loss could qualify as a non-capital loss if the pilfered cryptocurrency was essential to your company’s activities, such as assets kept for resale by a cryptocurrency exchange.

According to CRA guidelines, most people consider theft by strangers to be an inherent risk of doing business. The loss may thus be deducted if it is a reasonable incidental result of your income-earning activity.

Even if I don’t have any taxes due this year, why is it still necessary to keep track of my losses?

Recording and reporting your losses guarantees that you may utilize them later, even in years when you don’t owe taxes. While capital losses can cancel out capital gains, non-capital losses might lower taxable income in subsequent years. In more lucrative years, having the right paperwork now might drastically lower your tax obligation.

DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.

Image by macrovector via freepik

Stay informed with the latest legal developments at Global Law Experts