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Lost Cryptocurrency

Vast amounts of Cryptocurrencies including Bitcoin and Ethereum has simply been lost within the Blockchain system.  This has some benefit in reducing the supply of coin and bolstering the value of the remainder.  Some has been deliberately destroyed (burnt) for just that reason.  Most still exists somewhere but no one is able to access it.  The private keys to an on-line wallet may have been forgotten or a cold storage device literally lost.

The majority of these losses are accidental through errors in smart contracts or sending coin to unknown addresses.  Coinbase reported total losses of 636,000 ETH some 0.5% of the whole supply.  Bitcoin losses may stretch to 20% of all the Bitcoins ever mined. Some of these losses date back to the initial launches of Cryptocurrencies.  This was a time when values were relatively low and modest totals were banded about in start-up promotions.  The losses from such causes are reflected in coin totals and current values not from when they were initially minted.

In conventional banking if there is some error in sending money there are procedures in place to get it back.  The banking system has significant cash reserves and the experience to decide if the individual has made a genuine mistake, is a victim of a scam or is deliberately trying to defraud the system.  If Cryptocurrency is sent to an unknown address there is no such organised framework to get it back.  The best route is to hope that the recipient realises that a mistake has been made and that they will return the funds.  Even an honest trader might easily miss a rogue deposit and not chase it up.  The next step is to contact the crypto exchange or whatever body oversaw the handling of the transaction.  They could use their own funds to re-imburse any losses.  This might be the case with a fraud or scam where the exchange’s own systems are at fault and it is willing to use its reserves to maintain its trading reputation.   Coinbase for example will refund up to $1,000,000 where its own systems are seen to be at fault but nothing if the loser has been personally scammed.  Losses through fraud or error can be chased by dedicated investigators, either private organisations or law enforcement agencies.  These options are available where the loss is of sufficient magnitude to warrant the cost and workload.

If the private keys linked to a wallet are lost so too are the funds held within that wallet.  The funds themselves are not exactly lost or stolen, they are simply not accessible and hence of no use. Some exchanges such as PayPal do not issue private keys to individual accounts so this cannot happen.  For many users the possession of private keys is implicit to possession of the Cryptocurrency.  Private keys are usually linked to some form of recovery phrase.  This will be considerably easier to remember (and guess) than the derived private key.  If some part of this recovery phrase is still known it could be possible to re-construct the missing part and recover the private key.

In the case of un-lockable assets these can be written off as worthless.  In the UK the Capital Gains Tax system (which applies to Cryptocurrency trading) allows some losses to be offset against gains.  The locked Cryptocurrency needs to be declared as of ‘negligible value’.  Their book value would then be seen as a loss.  To be of any use this will need to be offset against any gains above the Capital Gains Tax annual exemption. Also any such offset will only be reducing tax paid above the tax free allowance (£6,000 in 2023/4) so the ‘negligible value’ plan will only really benefit those seriously involved with trading currencies or stocks.  Those are the sort of individuals that might be less likely to lose their private keys.

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