Are Crypto Rug Pulls Illegal in the US? Answers for 2026

In the US, there is no specific legislation against crypto rug pulls. Despite that, many rug pulls can be prosecuted under existing laws for fraud, theft, or money laundering.

A rug pull is a scam in which insiders promote a token or NFT project, strip it of its real value, and leave holders with something they cannot sell for much, if anything.

Most rugs share a common feature: the team controls something important: liquidity, contract settings, or a huge chunk of the supply. When they use that control against public buyers, the chart usually does not “dip.” It falls through the floor. That’s a rug pull.

Rug pulls are not explicitly illegal, but in practice, the behavior behind them can be prosecuted under existing laws.

If a team lies about what people are buying, hides how the token works, fakes partnerships, or drains pooled funds, prosecutors can treat that like fraud or theft.

The difficult part is enforcement. Anonymous teams, offshore operators, and fast-moving funds make it harder to identify who did what and where they can be reached.

Two projects might hurt investors with a rug, but only one might lead to legal action. A crypto rug pull is more likely to draw real legal attention when:

• The marketing involved clear lies, fake identities, or staged claims

• Funds moved in a way that looks like concealment, not normal trading

• Losses are large, victims are numerous, or the paper trail is easy to follow

• The team operated somewhere that investigators can actually reach them

In short, scams turn into legal cases when there is clear proof and someone the law can actually reach.

You cannot remove all risk in crypto, especially DeFi. You can avoid most clear rug pulls by checking a few key things.

This table highlights common crypto rug pull red flags and why they matter.

A helpful habit is to ask yourself how you would sell before you buy. If you do not know the answer, it is best to wait.

Rugs repeat the same playbook, just with new branding. Here are three patterns you will see again and again:

A viral token pumps fast, selling gets difficult, and insiders cash out. Everyone else is stuck.

• Squid Game Token (SQUID), 2021: This token rode the hype around the Netflix show, then price action went parabolic. Many buyers later found they could not sell normally. The token collapsed after the people behind it exited.

An NFT mint raises serious money, the site goes dark, funds move out, and the founders vanish.

• Frosties NFT, 2022: Frosties raised roughly $1.1M from buyers, then the project shut down, and the founders disappeared. US prosecutors later charged the creators with conspiracy to commit wire fraud and money laundering, which is a good example of how “rug pull” turns into criminal charges.

A DeFi project raises a pile of capital, then liquidity disappears, leaving the community staring into a dead pool.

• AnubisDAO, 2021: A DeFi token sale drew close to $60M, then the funds vanished shortly after. Whether you call it a rug pull, an inside job, or a key compromise, the result for users looked the same: liquidity gone and a dead token.

No project is completely safe from a rug pull. Some setups make it much harder for scammers to act quickly.

Look for a few positive signals:

• Liquidity is locked for a meaningful period

• The team has fewer “god mode” controls over the contract

• Ownership is transparent, and the team has a real track record

• Selling works normally, without hidden taxes, strange steps, or surprise restrictions

This table shows what to do immediately after a crypto rug pull, and why each step matters.

The hard truth is that crypto transactions are usually irreversible. If money is returned, it’s likely because investigators identify the responsible parties or an exchange freezes the funds. Don’t bank on this happening. In most cases, you must simply document your loss.

Reporting crypto rug pulls and scams in the US (FBI IC3)

Immediately report crypto rug pulls and scams to the FBI’s Internet Crime Complaint Center (IC3). The most useful thing you can provide is transaction detail, not a story.

Note: Be wary of anyone who claims they can “recover” your crypto. That is a common follow-on scam. Never give your seed phrase to anyone you don’t want to have total access to your crypto wallet.

For taxes, what matters is what happened on the blockchain during a rug pull, hack or scam.

• If you sold or swapped after the rug: you may have a crypto capital loss you can document.

• If you still hold a worthless token: you may not have a clean realized loss yet, depending on what you do next and whether there is an actual disposal event.

• If funds were stolen through fraud: the tax side can get complicated. Do not guess. Save records and keep the timeline clean. When in doubt, consult one of our crypto tax specialists.