As the world watched Bitcoins price soar to new heights last week, thousands of Bitcoins went missing from the popular mining application NiceHash. The company, which makes it easy for people to mine the most profitable “alt” coins and pays you out in Bitcoin, was robbed of over 4,700 coins at some time in early Wednesday morning, December 6, 2017. This not only left many in the crypto-currency community with their mining rigs running cold (the process of mining produces an immense amount of heat, so a cold miner is a broke miner), but it also left those same miners missing possibly thousands of dollars or more of mining profits. In addition, it left those who had money stored through the company’s wallet system high and dry. http://www.bbc.com/news/technology-42275523
The IRS has made it clear this year that it expects miners to report all income they receive from cryptocurrency, and based on this news, the IRS will be coming down hard on those who fail to report income. But reporting this income also means Miners will be able to deduct these kinds of losses on their tax forms as well. In the case of the stolen coin using the casualty and theft loss deduction.
Depending on your individual tax situation you may be able to claim the losses as either a personal return under Schedule A, or a business loss under Schedule C of the 1040 Form. https://www.irs.gov/taxtopics/tc515.
If your tax situation requires you to claim any lost coins as a personal loss, you will be subject to the same deduction rules that apply to all itemized deductions for theft. To calculate the amount a person is eligible to deduct you must subtract $100 from the value of the loss then subtract 10% of your adjusted gross income (subject to a maximum of your adjusted basis in the coins). This number will give your allowable loss deduction. It is also important to note if this loss exceeds your total net income for the year, you’re eligible to carry over a net operating loss (NOL) on your return to future years even if it is not business income. (This is an exception to the general rule which exists for casualty and theft income.)
To record and report all this information to the IRS you will need to file a Form 4684 (Section A).
Another important thing to note is that as this deduction is an itemized deduction you can only take the greater of the combination of your itemized deductions or the standard deduction. Thus, this strategy may not make sense if your losses are small, or you can not combine the amount with other itemized deductions.
Losses which are considered business assets from the theft can also be deducted. Following a similar procedure of filing a Form 4684 (Section B), one can deduct the losses against their business income. One benefit of this method is that these deductions are not subject to the same value reduction and can be used to directly offset business income. If these losses exceed income, then you can carry over a NOL to subsequent years.
At the end of the day, the tax right off is never going to make up for the entirety of the loss from any theft. But with the IRS coming after the cryptocurrency market with a vengeance this year, it may help to take some of the sting away to know that Uncle Sam will cut you a small break.
NiceHash has released a press release, and while no details were given it seems they may make whole the people whose accounts were drained. It will take time but we are working on a solution to ensure all users are reimbursed. “In an exclusive interview with WikiTribune, Marko Kobal, the CEO of NiceHash – a Slovenian-based crypto-mining marketplace – said that his company is “working on a solution to ensure that all users are reimbursed” for the $60m hack that took place last week.” This means you may not be able to deduct these losses. As of yet, it remains unclear as to whether the company will ever recover, but until more information comes out, a possibility exists that the coins will be returned or reimbursed by the company.
The bad news if this reimbursement goal is true is it will mean no Theft and Loss deduction can be used on the missing funds (Until we know for sure the money is stolen and not coming back). The good news, if this news is true, Nicehash patrons will have your missing Crypto-Coin back.