Losses from exchange shutdowns, wallet hacks, scams, and other events are unfortunately common in the world of cryptocurrency and NFTs today. However, how these events are taxed can vary depending on the circumstances. This guide walks through the most common forms of theft and crypto losses and the possible ways to treat them from a tax perspective in the United States.
Disclaimer: This post is for informational purposes only and should not be construed as tax, legal, or investment advice. The area of cryptocurrency taxation is constantly evolving and is not black and white. Please speak to your own tax expert, CPA, or attorney on how you should treat taxation of digital currencies.
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 Different crypto loss scenarios
When it comes to deducting or filing cryptocurrency losses, different situations are subject to different tax rules. The most common forms of cryptocurrency losses that we see here at
are listed below: CoinLedger Casualty Loss - (ex. Lost Wallet Access, Sent to Wrong Address) Theft Loss - (ex. Exchange/Wallet Hacked, Stolen Coins) Investment Loss - (Gray area = ex. ICO Scam, Exchange Shutdown) Each scenario of cryptocurrency loss will fall under one of these three classifications: Casualty loss, theft loss, or investment (capital) loss. It is up to YOU how you want to handle and report your losses. The three categories are explained further below. Can I write off lost cryptocurrency? 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 was passed into law, many forms of casualty losses that were previously deductible on Tax Cuts and Jobs Act , no longer qualify as a deduction. As seen on the Form 4684 , the only property that can be claimed as a deductible casualty has to be a federally declared disaster. IRS site here
In the case of cryptocurrency, anytime you negligently lose your cryptocurrency, it would be a casualty that is not deductible for tax purposes.
Examples of casualties that you would not receive a tax break include the following:
Coins lost from lost access to private keys & wallets Coins lost from sending 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?
A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property 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, post-2017 after the Tax Cuts and Jobs Act was passed, theft losses are no longer deductible on . If your cryptocurrency was stolen and classifies as a theft loss, it's unlikely that you can write this off. You can read more about the details of these rules in the Form 4684 . IRS guidance here
Reporting your lost crypto as an investment loss is the only approach that allows a tax exemption. As you will read below, it is unclear which crypto loss scenarios qualify for the investment loss status. We recommend consulting a tax professional with a unique situation. Our team is always happy to help refer you to someone.
Can I write off investment losses?
It is not explicitly clear whether events like ICO scams or exchange shutdowns (like Mt. Gox) can be treated as an investment loss. We surveyed many tax professionals familiar with cryptocurrency when writing this article, and they do not all agree on the proper treatment.
Investment losses are similar to a loss you would incur from buying a stock or another form of property and then selling it for less than you acquired it for. The same applies to selling bitcoin for less than you acquired it for.
This type of capital loss is reportable on
where you must list your Form 8949 in the property, the fair market value at the time you disposed of it, and the net gain or loss. As we discuss in our cost basis , up to $3,000 of net capital losses are deductible in any given year. Larger losses will carry forward to future tax years. This is the basic process for reporting the majority of cryptocurrency transactions. capital losses guide
No black and white guidance from the IRS exists for these specific scenarios, so ultimately you must use your discretion on how to classify and file these events. We will walk through the different options below.
How are rug pulls taxed?
Some cryptocurrency and NFT investors have lost money in a rug pull — a scam where founders promote a project then disappear with the funds, leaving investors with worthless assets.
In cases where there is no market for a rug-pulled asset, you may be able to claim an unrealized loss in certain situations (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.
If the asset has liquidity and is still being traded on exchanges, you will not be able to claim a loss until you dispose of it. This is the case even if your assets have lost significant value since you’ve originally received them.
How do I report losses on scam crypto projects/NFT mints?
Occasionally, investors may lose money on crypto tokens or NFTs that turn out to be fraudulent or non-existent. Tax professionals have differing opinions on how to treat these losses on tax returns.
According to Alexander Leruth, Founder & CEO of
and CFO of Ahrvo, “The correct method would be treating it as stolen which is a personal casualty loss that wouldn’t qualify for 8949.” Leruth goes on to explain, “you could try to claim it on 8949 and say that the value of the investment was essentially done at a $0 cost, but that’s a risky position to take.” Leruths
On the other hand, Pasha Malik, Co-Founder and President of Thyor Advisory Group (a tax compliance firm), argues that one should “treat investing in these types of projects as a capital investment. So a scam would be a capital loss on 8949. In such a case it is often recommended to obtain a report from the FBI, local police or SEC or Financial Crimes divisions that you have reported this investment as a fraud and scam. The report is for your own
protection." IRS audit
We surveyed many tax professionals when writing this piece, and there were many differing opinions on the proper treatment of these types of scams.
Ultimately, claiming a crypto/NFT scam as an investment loss will deduct the amount invested on Form 8949.
For example, if I invested $5,000 in exchange for what I was told would be 20,000 tokens of XYZ in an ICO which turned out to be fraudulent, then my 8949 would include a sell entry with a $5,000 cost basis, a $0 proceeds, and a $5,000 loss.
How do I report losses due to an exchange shutdown?
Exchange shutdowns like that of Cryptopia and Mt. Gox fall into a grey area of the tax code.
Some professionals argue that these would be an investment loss that can be reported on 8949, and therefore you receive a tax break, while others claim an exchange shutdown would be a non-deductible personal casualty loss.
Matt Metras, an enrolled agent and cryptocurrency taxation specialist at
, says that an exchange shutdown is “definitely a better fit on 4684 [Casualty Loss], however no one wants to hear that as 4684 is mostly gone post-Tax Cuts and Jobs Act.” Matt also goes on to say that “there is a nuanced argument for why it could be an investment loss, but that it’s a risky position to take.” MDM Financial Services
In our survey for writing this article, most tax professionals saw an exchange shutdown as a casualty loss, and thus not a deductible event. This is certainly the more conservative approach to take from a tax perspective. However, there was not complete consensus amongst professionals.
How to report your stolen and lost coins with CoinLedger
CoinLedger gives users the option to report lost or stolen coins on their tax returns. Here’s a
. complete walkthrough of the process Simplify your tax reporting today
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