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David Rotfleisch on Victims of “Pig Butchering” (Fake Crypto Investment) Scams: Tips on How to Claim a Tax Loss, Tax Deductions From a Canadian Tax Lawyer

posted 2 weeks ago

A pig butchering scam: what is it?

A devious scam known as the “pig butchering scam” targets gullible people who are lured into investing their hard-earned money into a fictitious cryptocurrency trading site that promises enormous rewards. Through a variety of channels, this intricate strategy entices victims, with social media platforms serving as a favorite hunting ground because of the susceptibility of people looking for connections. Scammers are skilled at creating false identities and reaching out to prospective victims in order to gradually win their trust before offering the phony investment opportunity.

One common strategy is to create fake websites that seem like authentic cryptocurrency platforms, sometimes even using names that are almost exact replicas of well-known companies. These fake websites are deliberately advertised on social media and forums, among other internet channels, where they deceive unsuspecting victims who are looking for investment possibilities. After falling prey to the scam, victims are convinced to contribute money to the fraudulent platform with the promise of large returns on their investments.

The tragic results of becoming a victim of a pig butchering scam are illustrated by the story of a real estate agent who lost an incredible $1.9 million in 2023. Targeted by a fraudster acting as a potential Instagram real estate buyer, this person fell victim to the dishonest network of false promises and deception. The loss suffered serves as a sharp reminder of the widespread reach and detrimental effects of such frauds, we helped him figure out which Canadian cryptocurrency tax deductions applied to his situation.

The University of Texas at Austin recently released the results of an extensive investigation that illuminated the startling scope of pig butchering frauds, showing that fraudsters have embezzled more than $75 billion from victims throughout the world. Examining information from cryptocurrency addresses linked to over 4,000 victims throughout a four-year span between January 2020 and February 2024, the research highlights the extent of financial destruction caused by these fraudulent operations.

Authorities in Canada have been proactive in alerting the public to the spread of cryptocurrency investment frauds, drawing attention to the variety that involves pig butchering. The British Columbia Securities Commission (BCSC), in partnership with law enforcement and financial integrity programs, has issued a warning about these frauds. Since the year 2023, victims in Richmond and Surrey have lost more than $31 million to these scams.

To counteract the plague of pig butchering frauds, law enforcement authorities, regulatory organizations, and financial institutions must work together. To prevent people from becoming victims of these sneaky schemes, it is crucial to raise awareness about the warning signs of fraud, encourage caution when interacting with strangers online, and cultivate a culture of skepticism about investment opportunities that seem too good to be true.

Possible tax situations for loss claims

Even if the majority of victims are never able to get back the money they lost to the scam, there may be ways for them to lessen their tax liability by declaring their cryptocurrency losses.

Business losses

It is possible to deduct business losses from non-capital income. Losses that occur after 2005 are recoverable for the previous three years and carried forward for a maximum of 20 years. For instance, profits from 2021 to 2041 might be countered by a loss from 2024. On the other hand, capital losses are only deductible to the extent of 50% and can only be offset by capital gains. These capital losses have three-year retrospective and indefinite forward carrying capacities.

Courts take into account a number of variables when determining whether the profits or losses from a transaction should be classified as capital or income. For tax purposes, this evaluation is essential, particularly when it comes to cryptocurrency transactions. A few variables that might affect this decision are as follows:

  1. Transaction volume or frequency: A history of large purchases and sales, or a rapid turnover of cryptocurrency units, might point to a commercial endeavor as opposed to an investment. The goal to benefit from transient price swings, which are typical of commercial activities, is implied by high-frequency trading.
  2. Length of Ownership: The length of time that cryptocurrency is owned is another important consideration. Longer holding durations may indicate a capital investment strategy geared toward long-term appreciation, whereas shorter holding periods are more likely to be connected with commercial deals intended to make rapid gains.
  3. Understanding of Cryptocurrency Markets: The taxpayer’s familiarity with and expertise in these markets is also taken into account. A business activity is suggested by extensive knowledge or specialized experience, since it indicates that the taxpayer is using his or her knowledge to make money through trading operations.
  4. Relationship to the Taxpayer’s Other Work: It might be inferred that cryptocurrency transactions constitute a component of a business if they are connected to the taxpayer’s other professional endeavors. For instance, it supports the classification of the taxpayer’s activities as business operations if they are engaged in the financial services or technology sectors, where cryptocurrency trading is significant.
  5. Time Spent: One of the most important metrics is how much time a taxpayer devotes to cryptocurrency-related activities. A significant period of time spent researching the markets and doing trades is indicative of business activity since it shows a professional attitude to trading.

The most important factor that courts take into account when deciding whether profits or losses are capital or business income is ultimately the taxpayer’s purpose or intent when purchasing cryptocurrencies. Courts will consider the objective aspects of the cryptocurrency acquisition and sell in order to determine the taxpayer’s purpose. To decide whether the main goal was to invest for long-term profits (showing capital gains) or to benefit from trading (indicating business income), the courts consider all of these criteria together.

Several aspects need to be considered in order to determine if cryptocurrency transactions result in capital gains or business revenue. These elements include the frequency of transactions, holding periods, market knowledge, connected professional activities, and time spent on trading activities. These elements are used by courts to deduce the taxpayer’s genuine intentions and make sure the tax treatment corresponds with the nature of the actions.

Capital losses

As per the Canadian Income Tax Act, a disposition, encompassing voluntary property transfers through sales or gifts, initiates a taxable event. Dispositions, however, can sometimes happen unintentionally, as in the event of theft, devastation, or expropriation. It might be argued that a person’s loss of cryptocurrency due to a fraudulent website is an involuntary disposition. In certain cases, the taxpayer can claim half of the initial cost as capital losses and report the cryptocurrency as disposed of with proceeds of sale valued at zero dollars.

The Income Tax Act provides further guidelines to determine the date of involuntary disposal. Property is usually deemed disposed of on the earliest of the following dates when it is destroyed or taken, whether legally or unlawfully:

  • Date of Agreement on Compensation: the time when the taxpayer consents to pay a certain amount in full for any lost or stolen property.
  • Tribunal or Court Determination: The date on which, in the event that the taxpayer has filed a claim with a tribunal or court, the tribunal or court will ultimately decide how much to compensate the property.
  • Two-Year Rule: The date that is two years after the property is taken or destroyed if no claim has been filed with a tribunal or court.

When implementing these regulations in a situation when cryptocurrency is lost due to fraud, the taxpayer must determine which of these circumstances is applicable. That date becomes the disposal date if they have been paid or if they have agreed to an arrangement with a compensating party. If the case is taken before a court or tribunal and compensation is not offered, the date of these organizations’ final decision will be the disposition date. However, the property is considered disposed of two years after the theft or loss occurred if neither compensation nor a legal claim is made.

Complete documentation is necessary when claiming a capital loss resulting from an involuntary disposal. The taxpayer is required to yield proof of the fraud or theft as well as the initial cryptocurrency purchase price. Communications with the scam website, police reports, and any efforts to retrieve the stolen items may all fall under this category.

In order to modify the taxpayer ‘s taxable income, the taxpayer must classify the loss as an involuntary disposition. By offsetting other capital gains, the capital loss may lower their total tax obligation. In order to ensure that the taxpayer may submit correct claims and get the proper tax relief, taxpayers who have experienced considerable losses as a result of cryptocurrency scams or other forced dispositions must understand these laws.

The involuntary disposition provisions of the Canadian Income Tax Act provide the framework for taxpayers to handle and lessen financial losses brought on by unanticipated events, such as pig butchering scams. Through adherence to the prescribed guidelines and provision of requisite paperwork, taxpayers may proficiently handle their tax liabilities and legitimately claim deductions.

Pro-tax tips: if there was never a true transaction, what loss position could a victim of pig-butchering take?

Because of the nature of these fraudulent operations, victims of pig-butchering frauds are faced with a difficult tax issue. People fall for these fraudulent activities, thinking they are trading cryptocurrencies on real trading sites. But no actual transactions take place since these platforms are completely fraudulent, created with the intention of tricking and stealing from gullible people.

Considering that many victims engaged these scams with the true goal of making trades, they may first think that filing a business loss would be the best course of action when assessing the tax ramifications. The fact that there were no real transactions, though, can be a crucial problem here. Claiming business losses is made more difficult by the fact that any alleged trading activity did not actually take place because the platforms were fake.

Making a claim for capital losses resulting from an involuntary disposition is an additional possible option. This method recognizes that victims have lost their capital due to fraud rather than bad trading decisions. However, strict rules apply to these kinds of claims. In Canada, victims are specifically required to wait two years before pursuing a claim for these losses, unless they are compensated by a third party or tribunal within that time. The victims, who have already experienced large losses, may face more financial hardship during this waiting time.

Because of these intricacies, it is essential that those who fall victims to pig-butchering schemes get assistance from Canadian tax professionals. For crucial advice tailored to their particular situation, speaking with a knowledgeable Canadian cryptocurrency tax lawyer can be extremely helpful. These tax experts have the ability to investigate every possibility, ensuring that victims choose the best possible tax strategy and adhere to all legal obligations.

All things considered, expert legal tax guidance can help you to get beyond these difficulties on your way to minimizing tax responsibilities in the wake of such frauds. Victims may be able to obtain some financial comfort amongst their losses by utilizing professional counsel to potentially lower their tax contributions.

FAQ: Frequently Ask Questions

What legal standard must be met to decide if a victim of a pig butchering scam fraud participated in a commercial adventure that resulted in a claim for business losses?

The following elements show the taxpayer’s purpose at the time they bought cryptocurrency, which will be the main focus of Canadian case law:

  • frequency or number of transactions,
  • ownership duration,
  • understanding of cryptocurrency markets,
  • the length of time the taxpayer spends on the various activities
  • Relationship with the taxpayer’s other work

When is it possible for a taxpayer to recover capital losses resulting from an involuntary disposition?

Generally speaking, the property is deemed to have been disposed of on the earliest date possible:

  • The day on which the taxpayer agrees to an amount as complete payment for destroyed or taken property;
  • The day when the taxpayer’s compensation for the property is ultimately determined by the tribunal or court, if the taxpayer has filed a claim with them; or
  • The day that is two years after the day the property was taken or destroyed if no claim has been filed with a tribunal or court.

What documentation is required from a taxpayer to support an involuntary disposition claim resulting from fraud or theft?

In order to support a claim of involuntary disposal resulting from fraud or theft, the taxpayer needs to present thorough and reliable documentation. Usually, this proof consists of:

  • Police Reports: One of the most important steps is to report something to law enforcement. The circumstances surrounding the theft or fraud should be included in the police report.
  • Communications: Emails, texts, and messages posted on trading platforms, as well as any other correspondence with the scammer or fraudulent organization, should be kept as proof.
  • Transaction Records: Comprehensive records of transactions that demonstrate the purchase and loss of cryptocurrencies. Printouts or images of the account history from the exchange or wallet containing the cryptocurrency are included in this.
  • Statements or Affidavits: Statements or affidavits from the individual outlining the circumstances preceding and following the loss, including the method by which the fraud was uncovered.
  • Efforts to Retrieve Assets: Recording of any correspondence with the exchange, wallet provider, or other financial organizations in connection with the theft of assets.

The above information contributes to the claim’s validity and offers the evidence required to back up the allegation of an involuntary disposition.

How does the timing of discovering the scam affect the ability to claim a capital loss?

Because of the particular restrictions pertaining to the timing of involuntary dispositions under the Canadian Income Tax Act, the timing of detecting the fraud can have a substantial influence on the ability to claim a capital loss:

  • Quick Recognition: The taxpayer may report the loss in the same tax year as the date of the involuntary disposition if the fraud is detected as soon as possible.
  • Delayed Discovery: The taxpayer must follow the two-year rule for claiming a disposition if there is a delay in realizing the fraud. When a settlement is reached, a tribunal or court rules, or, in the case that no claim is filed, two years after the incident, the property is deemed disposed of.
  • Retrospective Claims: The taxpayer may need to make changes to their prior tax returns in order to claim the capital loss for the appropriate year if the fraud is uncovered after filing the tax return for the year in which the loss occurred

To appropriately record the loss and guarantee compliance with tax requirements, timely detection and action are essential.

Are losses from personal investments and losses from business-related operations treated differently in terms of taxes in scam situations?

Yes, there are differences in tax treatment:

Personal Investments:

  • Capital Losses: They are subject to a 50% inclusion rate and can only be used to offset capital gains.
  • Carry-Forward and Carry-Back: Capital losses may be carried forward indefinitely or backward for a period of three years.

Business-related operations

  • Business Losses: Business losses are completely deductible from all revenue streams, not just capital gains.
  • Regular Business Operations: You can deduct losses from your business income by counting them as business costs.

Proper classification depends on the nature and intention of the taxpayer’s activities.

Disclaimer: The information provided in this article is only general in nature. Only the posting date makes it current. It can be outdated because it hasn’t been updated. It should not be trusted and does not provide legal advice. Every tax case is different from the examples given in the article since it is specific to its own set of circumstances. Consult a Canadian tax lawyer if you have any particular legal issues.

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