How To Claim a Tax Loss & Tax Deductions for Victims of ‘Pig Butchering’ Fake Crypto Investment Scams Tip: Tips From a Canadian Tax Lawyer

What’s a pig butchering scam?

A pig butchering scam is a fraud in which people are convinced to invest money in cryptocurrency into a fake crypto trading platform that seemingly generates very high returns. Once the victims have poured some or all of their savings into the scam website, the scammer disappears completely, and the victims can never withdraw or recover their money. Most scammers target victims on social medias where people are the most vulnerable because they’re trying to reach out to, to have contact with another human being.  Other times, the scammers would create fake websites that have almost identical names of real platforms and post links online to direct potential victims to their scam sites. In fact, one of our clients who’s a real estate agent lost 1.9 million US dollars to a pig butchering scam in 2023 when a scammer posed as a potential buyer for real estate in BC reached out to the individual on Instagram. We assisted him in determining the Canadian crypto tax deductions available in his circumstances.

A new study conducted at the University of Texas at Austin suggests that pig-butchering scammers have likely stolen over US$75 billion from victims worldwide, significantly more than previously thought. The study analyzed crypto addresses from over 4,000 victims over four years, from January 2020 to February 2024. In Canada, the B.C. Securities Commission has issued a warning about these cryptoinvestment scams, which they describe as "pig butchering." The BCSC, along with the BC RCMP Financial Integrity Program, Burnaby RCMP, the Canadian Anti-Fraud Centre (CAFC), the United States Secret Service, and the Vancouver Police Department, highlight scams that have cost victims in Richmond and Surrey over $31 million since the beginning of 2023.

Potential loss claim tax positions

Although most victims can never recover the money lost to the scam, specific options may be available for the victims to reduce their tax burden by claiming the crypto losses.

Business losses

Business losses are deductible against non-capital income. Those losses earned after 2005 can be carried forward 20 years and back three years (i.e. a business loss earned in 2018 can offset income earned between 2015 and 2038). On the other hand, only 50 percent of capital losses are deductible and can only be deducted from capital gains. These losses can be carried forward indefinitely and back three years. 

Courts assess a wide range of factors when deciding whether to characterize a transaction's gains or losses as on account of capital or income. Applied to cryptocurrency transactions, these factors may include:

• transaction frequency or volume—e.g., a history of extensive buying and selling of cryptocurrency or of a quick turnover of cryptocurrency units might suggest a business;
• length of ownership—e.g., brief periods of holding the cryptocurrency indicate business dealings, not capital investing;
• knowledge of cryptocurrency markets—e.g., increased knowledge of or experience with cryptocurrency markets favours a business characterization;
• relationship to the taxpayer's other work—e.g., if cryptocurrency transactions (or similar dealings) form a part of a taxpayer's employment in other business, it points toward business;
• time spent—e.g., a greater likelihood of characterization as a business if a substantial part of the taxpayer’s time is spent studying cryptocurrency markets and investigating potential purchases;

Ultimately, the taxpayer's motive or intent when acquiring the cryptocurrency is the most important criterion that courts consider when determining whether the transaction produced a capital gain or business income. Still, to discern a taxpayer's intention, courts will focus on the objective factors surrounding both the purchase and the sale of the cryptocurrency. In other words, courts will determine a taxpayer's intent by evaluating the factors listed above.

Capital losses

Under the Canadian Income Tax Act, a taxable event is triggered by a disposition, such as a voluntary property transfer to someone via sale or a gift. However, disposition can also be triggered involuntarily due to theft, destruction, or expropriation. When a victim loses his cryptos to a scam website, the victim can be considered to have involuntarily disposed of his crypto properties at the proceeds of disposition of zero dollars and claim half of the cost as capital losses.

In the case of involuntary dispositions, the Income Tax Act provides additional rules to clarify when a disposition took place. When a taxpayer is treated as having disposed of a property that was destroyed or taken, lawfully or unlawfully, by someone else then typically the property is treated as being disposed of on the earliest of the following dates:

• The day the taxpayer agrees to an amount as the full compensation for the destroyed or taken property;
• Where the taxpayer has made a claim before a tribunal or court, the day on which the taxpayer’s compensation for the property is finally determined by the tribunal or court; or
• Where no claim has been made before a tribunal or court, the day that is two years following the day of the destruction or taking of the property.

Pro tax tips – what loss position should a pig-butchering victim take when there was never any real transaction?

Although business losses would be a more beneficial position to take, and most victims had the intention to trade when introduced to the fake websites, one dilemma is that there were no real transactions on the fake websites. As for capital losses triggered by involuntary disposition, victims still need to wait for two years to claim the losses if there is no compensation from a third party or tribunal. Therefore, it is highly recommended that a pig butchering scam victim seek help from an experienced Canadian cryptocurrency tax lawyer to find the most appropriate solution to lessen his tax burden.

FAQ:

What’s the legal test to determine whether a pig butchering scam victim engaged in an adventure in the nature of trade which led to business losses claim?

Canadian case law will focus on intention at the time a taxpayer purchased cryptos, and it’s reflected by the following factors:

• transaction frequency or volume
• length of ownership
• knowledge of cryptocurrency markets
• relationship to the taxpayer’s other work
• time spent on the activities.

When can a taxpayer claim capital losses from an involuntary disposition?

Typically, the property is treated as being disposed of on the earliest of the following dates:

• The day the taxpayer agrees to an amount as the full compensation for the destroyed or taken property;
• Where the taxpayer has made a claim before a tribunal or court, the day on which the taxpayer’s compensation for the property is finally determined by the tribunal or court; or
• Where no claim has been made before a tribunal or court, the day that is two years following the day of the destruction or taking of the property.

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.