Can I write off my crypto losses for tax purposes?
Wondering whether your stolen/lost crypto can be deducted on your tax return? Here’s a quick breakdown of the most common scenarios where you can potentially write off your crypto.
We’ll explain each of these scenarios in more detail below.
Note – if your cryptocurrency simply went down in price prior to selling it, this is considered a capital loss or an investment loss. This is different from some of the losses we discuss below. For more detailed information, please read our guide on how to deal with capital losses for your cryptocurrency.
Can I recover my lost and stolen crypto?
Unfortunately, it’s often difficult to recover lost and stolen cryptocurrency. Cryptocurrency transactions are irreversible — and the ecosystem’s decentralized nature means that there’s typically no centralized entity that can provide help in the case of a hack.
One exception is if you lost your cryptocurrency due to exchange bankruptcy.
In this case, you may be able to recover your funds once the bankruptcy process is over. However, you may have to wait months or even years for the process to complete.
What should I do if I get scammed?
Report the scam: Report the scam to your local law enforcement, relevant cryptocurrency platforms, and the FBI’s Internet Crime Complaint Center.
Document the incident: Keep records of everything related to the scam — including the amount of cryptocurrency taken and any relevant wallet addresses and usernames. This can help a potential investigation.
Review scam prevention: To avoid these types of incidents in the future, take some time to review best practices for scam prevention.
What are the different types of crypto losses?
In the United States, different tax rules apply to different scenarios. Cryptocurrency losses typically fall under the following classifications — including each one of the scenarios we’ll cover in the article:
- Casualty Loss – (ex. Lost wallet address, crypto sent to wrong address)
- Theft Loss – (ex. Exchange/wallet hacked, stolen coins)
- Investment Loss – (Gray area = ex. ICO scam, exchange shutdown)
Can I write off lost cryptocurrency?
Summary: Lost cryptocurrency is no longer tax deductible after the 2017 Tax Cuts and Jobs Act — unless you lost crypto in a federally declared disaster.
A casualty loss is damage, destruction, or property loss resulting from one of these identifiable events:
- Sudden event — swift, rather than gradual or progressive
- Unexpected event — ordinarily unanticipated and unintended
- Unusual event — not a day-to-day occurrence
Post 2017, after the Tax Cuts and Jobs Act was passed into law, many forms of casualty losses no longer qualify as a deduction. As seen on the IRS website, the only property that can be claimed as a deductible casualty is property lost due to a federally-declared disaster.
As a result, negligently losing your cryptocurrency would be considered a non-deductible casualty for tax purposes.
Examples of casualties where you would not receive a tax break include the following:
- Coins lost from lost access to private keys & wallets
- Coins lost from sending crypto to incorrect addresses
- Other negligent forms of crypto loss
In these cases, you cannot claim a capital gain or loss on your cryptocurrency.
Can I wrote off stolen cryptocurrency?
Summary: Stolen cryptocurrency is no longer tax deductible after the 2017 Tax Cuts and Jobs Act.
Theft is defined as an act of taking and removing of money or property with the intent to deprive the owner of it. For an act to qualify as theft, it must be illegal under the law of the state where it occurred and done with criminal intent.
Common cryptocurrency theft losses include the following:
- Stolen Coins
- Hacked Wallets
- Hacked Exchange Accounts
Similar to casualty losses above, theft losses are no longer deductible on Form 4684 after the Tax Cuts and Jobs Act of 2017. If your cryptocurrency was stolen and classified as a theft loss, you cannot write it off on your taxes.
You can read more about the details of these rules in the IRS guidance here.
Will I pay tax on coins lost in a crypto scam?
Summary: You won’t pay capital gains tax for losing your crypto to a scam or theft.
While you may not be able to write off stolen cryptocurrency as a tax deduction, losing cryptocurrency to a theft, hack, or a scam is not considered a ‘disposal’. That means you won’t be charged capital gains tax.
Can I write off investment losses?
Summary: When you dispose of your cryptocurrency at a loss, you can offset capital gains and up to $3,000 of income.
One scenario where you can write off your cryptocurrency on your taxes is an investment loss. This is when you dispose of your cryptocurrency for a lower price than you originally received it.
These types of capital losses can offset capital gains and up to $3,000 of income for the year. Additional losses can be rolled forward into future tax years.
In some cases, you can claim an investment loss in scenarios like a rug pull or an exchange bankruptcy. We’ll go into more detail about how you can claim investment losses in these scenarios below.
Can I claim a tax deduction on a crypto/NFT scam?
Summary: If there is no market for your rug-pulled or scammed crypto assets, you can write off unrealized losses. If there is a market for your crypto-assets, you can dispose of your assets and claim an investment loss.
Occasionally, investors lose money on crypto tokens or NFTs that turn out to be fraudulent or non-existent.
If the asset has liquidity and is still being traded on exchanges, you can only claim a loss once you’ve disposed of it. This is true even if your crypto-asset has lost significant value.
You can only claim a loss without selling if there is no market for the asset (ex. The asset has no trading volume on exchanges). In this case, there is no reasonable expectation of a return of capital on your investment.
How are exchange bankruptcies taxed?
Summary: Exchange bankruptcies may be treated as an investment loss (deductible) or a casualty loss (non-deductible).
Some tax professionals recommend treating cryptocurrency lost to an exchange bankruptcy — like Celsius and FTX — as an investment loss.
Can I claim my assets as worthless if I don’t have access to them?: Typically, you are required to dispose of your assets in order to claim an investment loss and offset capital gains and income. However, in the case of an exchange bankruptcy, you can treat your lost assets as ‘worthless’. It’s important to remember that by doing so, you are relinquishing your rights to reclaim the assets after the bankruptcy process is over.
What happens if you claim a casualty loss?: Another option is to treat cryptocurrency lost in an exchange bankruptcy as a casualty loss. However, these types of losses are not considered tax-deductible.
How to report your lost & stolen crypto with CoinLedger
Looking for an easy way to report your lost and stolen cryptocurrency? You can report your losses on crypto tax software like CoinLedger. Here’s a complete walkthrough of the process.
File your cryptocurrency taxes today
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