Hacking and scams targeting crypto assets (also known as virtual currencies) are far from rare. Cases have occurred where crypto asset exchange service providers suffered unauthorized access and lost customer funds, as well as cases where people were approached with investment pitches through social media or dating apps and ended up transferring crypto assets to scammers.
Believing this, the man transferred a total of ¥189.8 million from his bank account to a crypto exchange account he had opened, in 18 transfers between early March and late April, and was defrauded of the funds.
Source: FNN Prime Online
Crypto assets sent to an external address generally cannot be recovered. This is why, when assets cannot be recovered, many people wonder whether the amount lost can be treated as an expense, or whether it can reduce their tax bill through their final tax return.
To get straight to the point, the tax treatment of lost crypto assets can vary depending on the nature of the loss. Crypto assets transferred against the victim's will due to unauthorized access may not necessarily be treated the same way as crypto assets the victim sent themselves after being deceived by a fraudulent site or fake investment scheme.
In addition, if you receive compensation for damages such as an exchange hacking incident, you also need to check whether that compensation is subject to tax.
This article organizes the tax treatment of lost crypto assets based on information published by tax and accounting firms, along with materials from the National Tax Agency (NTA). It does not determine whether any individual filing is appropriate, so when you actually file your return, please consult a tax accountant who is knowledgeable about crypto asset taxation.
Tax Considerations to Check When You Lose Crypto Assets
If you lose crypto assets, the first thing to check is "the circumstances under which you lost them." This is because, for tax purposes, how the situation is classified can differ depending on the following cases.
- Cases where assets were taken against the victim's will
- Cases where the victim was deceived into sending the assets themselves
For example, if a wallet is accessed without authorization and crypto assets are sent out without the owner's involvement, this may be treated as theft and could qualify for the casualty loss deduction (zatsuson koujo). On the other hand, if you send crypto assets yourself — as in a romance scam or a transfer to a fake exchange — this may be treated as a loss due to fraud, and could fall outside the scope of the casualty loss deduction.
That said, it can be difficult to draw a clear line between "theft, fraud, and embezzlement" when it comes to crypto asset losses. In phishing cases in particular, the assessment can differ depending on whether the case is viewed as "the victim entered their own private key" or as "the assets were taken against the victim's will" (source: Kaoria Accounting Office).
If the Loss Qualifies as Theft, It May Be Eligible for the Casualty Loss Deduction
If crypto assets are transferred against the owner's will due to unauthorized access or theft of a private key, this may be treated as theft. In this case, rather than expense deduction, the discussion tends to focus on whether the loss qualifies for the casualty loss deduction.
Losses from the theft of crypto assets (hacking, phishing, etc.) can potentially qualify for the casualty loss deduction.
Source: Kaoria Accounting Office
The casualty loss deduction is a system that allows a certain amount to be deducted from income when assets suffer damage due to a disaster, theft, or embezzlement. Depending on the nature of the damage, crypto asset theft may also be eligible for consideration under this deduction (source: National Tax Agency).
Crypto asset hacking damage does not always qualify for the casualty loss deduction. Because crypto assets are not physical property, careful judgment is required as to whether they can be treated the same way as conventional "theft."
For example, an article by the Kenji Yanagiya Tax Accountant Office notes that, because crypto assets generally do not qualify as tangible property, it is difficult to characterize data tampering caused by hacking as theft in the strict sense — but if it is treated the same way as skimming crimes, it could potentially qualify for the casualty loss deduction.
However, in cases where funds are withdrawn from a bank deposit through skimming (a criminal act of unlawfully reading and copying the magnetic-stripe data of another person's cash card or credit card), the loss is considered eligible for the casualty loss deduction if a police report has been filed and there is proof that it was accepted (per the February 23, 2005 notice, "Handling of Police Certification Procedures for Casualty Loss Deduction Filings for Losses Caused by 'Skimming Crimes' and Other Offenses"). If crypto asset hacking is treated in the same way as skimming crimes, it is thought that it could similarly qualify for the casualty loss deduction.
Cases Where Funds Were Sent from a Wallet Without Authorization Due to Unauthorized Access
If a wallet is accessed without authorization and crypto assets are sent to an external address without any action by the owner, this may be treated as theft. In this case, you need to organize the circumstances at the time of the incident, the transfer history, transaction IDs, and any traces of the unauthorized access.
For tax purposes, when considering the casualty loss deduction, it is important to have documentation showing that the damage occurred due to an external factor beyond the owner's control. Records of consultations with the police and the receipt number of a police report can also serve as evidence to explain the circumstances later on.
Cases Where Assets Were Transferred After a Private Key or Recovery Phrase Was Stolen
If a private key or recovery phrase is stolen by a third party and the crypto assets in the wallet are transferred as a result, this may also be classified as theft. However, if you entered the information yourself on a phishing site, it could instead be assessed as fraud.
For this reason, it is important not to judge the situation based solely on the statement "my private key was stolen," but to clarify the circumstances under which the third party came to know it.
If the Loss Qualifies as Fraud, It May Not Be Eligible for the Casualty Loss Deduction
If you are deceived by a romance scam, a fake exchange, or a fraudulent investment site and send crypto assets yourself, this may be treated as fraud rather than theft. In this case, it may not be eligible for the casualty loss deduction.
The casualty loss deduction covers losses caused by "disaster, theft, or embezzlement." Regarding fraud, after referencing the casualty loss deduction provisions of the Income Tax Act, commentary concludes that fraud is not included among these categories.
Both Article 62 and Article 72 referenced above cover "disaster, theft, and embezzlement." Since fraud does not fall under any of "disaster, theft, or embezzlement," it appears that neither provision applies to losses from crypto asset fraud.
For this reason, if you send crypto assets as a result of fraud, it is best not to simply assume that "because it was taken from me, I can use the casualty loss deduction." Even if you were deceived, if the transfer resulted from your own action, it may be treated differently from theft.
Cases Where Crypto Assets Were Sent Due to a Romance Scam
In romance scams, victims are approached with investment offers by someone they met through social media or a dating app, and end up sending crypto assets. Because the victim performs the transfer themselves in this case, it may be classified for tax purposes as fraud rather than theft.
If treated as fraud, the loss may not be eligible for the casualty loss deduction. However, as explained later, if the crypto asset qualifies as an asset that generates miscellaneous income, it may be possible to consider deducting the loss as a necessary expense.
Cases Where Crypto Assets Were Sent to a Fake Exchange or Fake Investment Site
Sending crypto assets to a fake exchange or fake investment site can also be treated as fraud. Even if the on-screen balance appears to be growing, withdrawals are often not actually possible, and victims may be asked to send additional funds under the pretext of fees or taxes.
In these cases, to help prove that fraud occurred, it is important to gather and keep the following information.
- Transfer history
- Correspondence with the other party
- The URL of the site you were directed to
- Screenshots of the balance shown on screen
- The destination address
This information is needed not only for tax determinations but also when consulting the police or other professionals.
Losses from Fraud May Be Eligible for Deduction as a Necessary Expense
Losses caused by fraud may not be eligible for the casualty loss deduction. That does not mean, however, that they cannot be taken into account for tax purposes at all. If the crypto asset qualifies as an asset used to generate miscellaneous income, or as an asset that gives rise to miscellaneous income, it may be possible to consider deducting the loss as a necessary expense under Article 51, Paragraph 4 of the Income Tax Act.
An article by the Eisuke Yasuda CPA & Tax Accountant Office notes that losses from fraud are unlikely to be recognized as an ordinary necessary expense, but considers deducting them as an asset loss under Article 51, Paragraph 4 of the Income Tax Act.
An article by Kaoria Accounting Office likewise concludes that, while losses from fraud fall outside the scope of the casualty loss deduction, they may be deductible as a necessary expense against miscellaneous income under Article 51, Paragraph 4 of the Income Tax Act.
Whether the Asset Gives Rise to Miscellaneous Income Is the Key Question
When considering whether a fraud-related crypto asset loss can be treated as a necessary expense, it is important whether the crypto asset qualifies as "an asset that gives rise to miscellaneous income."
If the crypto asset was held for investment purposes with the expectation of generating profit through sale or exchange, it may be classified as an asset that gives rise to miscellaneous income. On the other hand, the determination can vary depending on the purpose of holding it and the actual pattern of trading, so it needs to be checked on a case-by-case basis.
What matters here is that losing the asset to fraud does not automatically mean it can be deducted as an expense. You need to organize the purpose for which you held the crypto asset, your trading history, whether the loss has been finalized, and whether any compensation was received, and then check with a tax accountant.
The Amount Deductible as a Necessary Expense May Be Capped at the Miscellaneous Income Amount
Even when a crypto asset loss caused by fraud can be deducted as a necessary expense, the deduction is not unlimited. Article 51, Paragraph 4 of the Income Tax Act sets out the principle that such losses can be deducted as a necessary expense only up to the amount of miscellaneous income.
As a result, if your miscellaneous income from crypto asset trading in that year is small, or if no miscellaneous income arose at all, you may not be able to deduct the full loss. Also, unlike the casualty loss deduction, some interpretations hold that this type of loss cannot be carried forward and deducted in future years.
The necessary expense deduction is capped at the amount of miscellaneous income for that year, so if miscellaneous income is zero or negative, the loss cannot be fully deducted. In addition, the three-year carry-forward deduction is not permitted, meaning the scope of relief is more limited compared with the casualty loss deduction.
Source: Kaoria Accounting Office
Tax Treatment When You Receive Compensation for an Exchange Hacking Incident
There are also cases where, rather than an individual wallet, a crypto asset exchange service provider itself is hacked and becomes unable to return the crypto assets it was holding on deposit. In such cases, victims may later receive compensation in Japanese yen or another currency in place of the crypto assets.
Receiving compensation does not necessarily mean it is "tax-free because it is a damages payment." The NTA has published its view, in a Tax Answer (its official FAQ series), on the tax treatment of monetary compensation received from a crypto asset exchange service provider in place of crypto assets.
In general, even money paid as damages is not treated as tax-exempt when it compensates for the loss of what should originally have been income, or profit that would otherwise have been obtained.
The tax treatment in question must be determined by comprehensively considering the contract between the customer and the crypto asset exchange service provider and the nature of the compensation, among other factors. In general, however, compensation paid when an exchange is unable to return crypto assets held on behalf of a customer is money paid in place of the crypto assets that could not be returned. Because this produces the same result as if the customer had sold the crypto assets for the same amount and received money, the compensation is considered to include an element that represents what should originally have been income or profit that would otherwise have been obtained.
Accordingly, the compensation in question does not qualify as a tax-exempt damages payment and is subject to tax as miscellaneous income.
Source: National Tax Agency
The NTA explains that compensation paid in place of crypto assets that can no longer be returned produces the same result as if the crypto assets had been sold for cash. On that basis, it states that such compensation does not qualify as a tax-exempt damages payment and is taxable as miscellaneous income.
Costs Incurred in Responding to the Incident May Be Eligible for Expense Deduction
Separately from the loss of the crypto assets themselves, you also need to check the costs you paid to respond to the incident. For example, the following types of costs may be incurred.
- Investigating the extent of the damage
- Organizing transaction history
- Consulting a tax accountant
- Preparing the tax return
- Checking the state of the wallet
These costs may be considered for deduction as necessary expenses if you can demonstrate their connection to your crypto asset transactions. However, not all costs qualify as expenses. You will need evidence such as the purpose of the expenditure, its relationship to your crypto asset transactions, and receipts or invoices.
Because tax treatment is determined on a case-by-case basis, if you plan to actually treat these as expenses, gather documentation that clearly shows what was paid and check with a tax accountant.
Costs of Investigating the Damage and Organizing Transaction History
When you lose crypto assets, the first thing you need to do is organize your transaction and transfer history. Without confirming which exchange the funds were sent from, which wallet they went to, when, and how much, you cannot explain the amount of the loss or the nature of the damage.
If you incurred costs for crypto asset gain/loss calculation tools, transaction history organization services, or on-chain transaction investigations, you may be able to demonstrate their connection to your crypto asset transactions.
That said, costs that are not directly related to crypto asset transactions, such as household budgeting or personal recordkeeping, cannot necessarily be treated as expenses. It is important that invoices and usage statements clearly show what the expense was for.
Costs of Consulting a Tax Accountant and Preparing Your Tax Return
In cases of crypto asset hacking or fraud, you may incur costs for consulting a tax accountant. Whether you are considering the casualty loss deduction or a necessary expense deduction, the tax determination requires professional review.
Fees paid to a tax accountant for tasks such as filing your final tax return relating to crypto asset transactions, calculating gains and losses, organizing the amount of damage, and preparing the tax return may be eligible for consideration as necessary expenses.
However, if the fees also cover matters unrelated to crypto asset transactions — such as inheritance consultations, household finance advice, or company incorporation consultations — you need to separate out those costs. Keeping an itemized breakdown of the invoice makes it easier to explain later.
Costs of Checking a Wallet or Investigating the Possibility of Recovery
Even when you believe you were hacked, sometimes the reality is simply that you cannot log into the wallet, that the assets are not displaying in a different wallet, or that you are using the wrong compatible wallet. In these cases, you may need to confirm where the assets are and investigate whether recovery is possible.
If you hire a specialist to check the wallet, verify the format of the private key or recovery phrase, or confirm the on-chain balance, the resulting costs may be shown to be connected to your crypto asset transactions.
Incidentally, when requesting recovery or investigation services, you should never casually share your private key or recovery phrase with a third party. If this information is exposed, there is a risk that the assets in your wallet could be moved. It is important to verify the legitimacy of the service provider, the contract terms, the fees, and the scope of work before making a request.
Keep Evidence If You Plan to Pursue the Casualty Loss Deduction or Necessary Expense Deduction
If you lose crypto assets, preserving evidence is essential when considering the tax treatment. If you cannot demonstrate the fact of the loss and its amount, it may become difficult to pursue the casualty loss deduction or a necessary expense deduction.
The purpose of preserving evidence is not limited to your tax return. Objective documentation is also needed when consulting the police, a lawyer, a tax accountant, an exchange, or a wallet investigation specialist.
Preserve Your Transaction History, Transfer History, and Transaction IDs
The first thing you should preserve is your crypto asset transaction and transfer history. Your exchange withdrawal history, wallet transfer history, destination addresses, and transaction IDs are all important for confirming the sequence of events in the incident.
While on-chain transactions may be publicly viewable, exchange account information and withdrawal history may become unavailable later on. For this reason, you should save this data as CSV files or screenshots as soon as you become aware of the incident.
Keep Records of Police Consultations and Police Report Filings
If you fall victim to hacking or fraud, be sure to keep records of your consultations with the police and any police report you file. When considering the casualty loss deduction, the receipt number or certificate of receipt for a police report can be important documentation to substantiate the theft.
Even in fraud cases, having a record of consulting the police makes it easier to explain what happened. Organizing details such as your correspondence with the other party, the destination address, the amount of the loss, and when you became aware of the incident before consulting will make the explanation easier.
Keep Records of Consultations with Professionals and Their Receipts
If you consult a tax accountant, lawyer, wallet investigation specialist, or other professional, keep records of the consultation and the receipts. It is important to be able to explain what purpose the work served, what tasks were requested, and how much was paid.
In particular, if you plan to consider costs incurred in responding to the incident as expenses, keeping not only receipts but also invoices, contracts, and email correspondence will make it easier to explain the nature of the expenditure.
If You Lose Crypto Assets, Don't File on Your Own Judgment — Consult a Professional
If you lose crypto assets to hacking or fraud, the tax treatment is not uniform. If the loss resulted from theft via unauthorized access, it may be eligible for the casualty loss deduction, whereas if you transferred the assets yourself as a result of fraud, the discussion is more likely to shift toward considering a necessary expense deduction rather than the casualty loss deduction.
In addition, if you receive compensation as a result of an exchange hacking incident, that compensation may be taxable as miscellaneous income. The crypto assets that were stolen, the crypto assets lost to fraud, any compensation received, and the costs of responding to the incident each need to be considered separately.
Note on Japan's crypto tax framework: As of July 2026, gains from selling crypto assets are taxed as miscellaneous income under aggregate (progressive) taxation. On July 15, 2026, a revised Financial Instruments and Exchange Act (FIEA) was passed by the House of Councillors, reclassifying crypto assets as financial instruments under the FIEA; a flat 20% separate self-assessment tax rate is expected to apply from the fiscal year after the revised law takes effect (expected around January 2028). Separately, losses on crypto assets can only be offset against other miscellaneous income — they cannot be offset against employment income or other income categories.
Filing on your own judgment could result in needing to amend your return later. First, organize your transaction history, transfer history, transaction IDs, records of police consultations, and payment records for professional services, and then consult a tax accountant who is knowledgeable about crypto asset taxation.
Separately from the tax determination, if you want to confirm whether the crypto assets have truly been lost or whether there is a possibility they remain in the wallet, you will also need to check the state of the wallet and investigate whether recovery is possible. If you still hold the private key or recovery phrase, there may be a possibility of regaining access to the assets, so consult a specialist depending on your situation.
This article is for informational purposes only and does not constitute financial or investment advice. Please consult a qualified professional before making investment decisions.
