If you’re dealing with lost, stolen, or scammed cryptocurrency, you might be wondering: can you claim these losses on your taxes? The answer depends on the type of loss and how it’s categorized by tax laws. Understanding these rules is crucial for effectively managing your crypto investments and tax obligations. In this guide, we’ll cover the most common types of crypto losses, how they affect your taxes, and the steps you can take to navigate these challenging situations.
Lost and Stolen Crypto: Are They Tax Deductible?
Lost Cryptocurrency
Unfortunately, if you’ve lost cryptocurrency due to negligence, such as misplacing your private keys or sending funds to the wrong wallet address, these losses are not tax deductible. This also applies to other situations where crypto is considered “lost.” The 2017 Tax Cuts and Jobs Act eliminated deductions for casualty losses unless they occur during a federally declared disaster. For crypto holders, this means that personal errors resulting in lost assets won’t count as a deductible loss for tax purposes.
Stolen Cryptocurrency
If your cryptocurrency was stolen through hacks, theft, or other illegal activities, it is also not deductible under current U.S. tax laws. The IRS removed the ability to claim theft losses following the 2017 Tax Cuts and Jobs Act. While these situations can be financially devastating, they unfortunately don’t offer any tax relief.
Scammed Crypto: What Can You Do?
If you were scammed out of your cryptocurrency—whether through a phishing attack, a rug-pull project, or another fraudulent scheme—you might have some options.
- Claiming Worthless Assets: If the cryptocurrency you were scammed into buying has no market or trading volume, you may be able to declare it as worthless on your taxes. This allows you to claim it as an investment loss, provided you give up any hope of recovery.
- Selling to Realize a Loss: If the asset has some remaining value but is still being traded, you’ll need to sell it to realize a loss. Only then can you deduct it on your taxes.
Investment Losses: The One Tax-Deductible Crypto Loss
Investment losses, where you sell or dispose of your cryptocurrency at a lower price than you paid for it, are fully deductible under IRS rules. For example:
- John buys $10,000 worth of Bitcoin (BTC).
- Later, BTC’s value drops to $8,000, and John decides to sell it.
- John realizes a $2,000 capital loss, which can offset capital gains or up to $3,000 of his regular income.
Investment losses can also be carried forward to offset gains in future tax years, providing ongoing tax benefits.
What About Exchange Bankruptcies?
If you lost cryptocurrency due to an exchange bankruptcy, such as those involving FTX or Celsius, your losses may qualify as investment losses. Some tax professionals suggest treating assets lost in bankruptcies as “worthless.” This allows you to claim the loss without selling the asset, but it requires you to forfeit any future recovery of funds once the bankruptcy process is complete.
It’s worth noting that crypto lost in exchange bankruptcies may also be classified as casualty losses. However, under current tax rules, casualty losses are not deductible unless they occur in a federally declared disaster.
How to Report Lost or Stolen Crypto on Taxes
Reporting cryptocurrency losses can be complex, especially when dealing with lost, stolen, or scammed assets. Using crypto tax software like CoinLedger can simplify this process. CoinLedger allows you to connect your wallets and exchanges, automatically generating tax forms that include your crypto gains and losses. This makes it easier to ensure compliance with tax laws while minimizing errors.
Steps to Take if You’re a Victim of Crypto Theft or Scams
If you’ve been a victim of crypto theft or scams, taking the following steps can help protect yourself and your investments:
- Report the Incident: Notify your local authorities, the cryptocurrency platform involved, and the FBI’s Internet Crime Complaint Center (IC3). Filing a report can help with investigations.
- Document Everything: Keep detailed records of wallet addresses, transactions, amounts, and communication related to the scam or theft. This documentation may be useful if recovery efforts are possible.
- Educate Yourself on Prevention: Learn how to better secure your cryptocurrency by using hardware wallets, enabling two-factor authentication, and avoiding suspicious projects. Familiarize yourself with common scams and how to spot them.
Key Takeaways
- Lost Crypto: Not tax deductible unless lost in a federally declared disaster.
- Stolen Crypto: Cannot be deducted under current tax laws.
- Scammed Crypto: May be deductible as an investment loss if the asset is disposed of or deemed worthless.
- Investment Losses: Can offset capital gains and up to $3,000 of other income, with additional losses carried forward.
- Exchange Bankruptcies: Assets may be treated as investment losses or claimed as worthless, depending on the situation.
Simplify Crypto Taxes with CoinLedger
Navigating cryptocurrency taxes doesn’t have to be complicated. Over 500,000 investors trust CoinLedger to simplify their tax reporting. With CoinLedger, you can connect your wallets and exchanges to automatically generate accurate tax forms, saving you time and hassle.
FAQs
Q: Can I write off crypto lost to a scam?
A: Yes, but only if the asset is deemed worthless or you dispose of it to realize a loss.
Q: Are lost private keys deductible?
A: No, losing private keys is considered negligence and is not tax deductible.
Q: Do I pay taxes on stolen crypto?
A: No, stolen crypto is not taxable, but you cannot deduct the loss either.
Q: How can CoinLedger help with crypto taxes?
A: CoinLedger simplifies tax reporting by syncing your wallets and exchanges and automatically generating tax forms.
Don’t let crypto taxes overwhelm you—get started with CoinLedger today and file your taxes in minutes!
