Can You Write Off Crypto Hacks?

For individuals, personal casualty losses are generally not deductible unless the loss is linked to a federally declared disaster. If the loss involves property held for investment or used in a trade or business, different rules may allow a deduction, but you must meet strict requirements and keep complete documentation.

To qualify as a casualty, the precipitating event must be sudden, unexpected, and unusual under IRS standards. If your loss does not meet these tests, you typically must realize a loss by selling or otherwise disposing of the asset to claim it for tax purposes.

A theft loss deduction for individuals is not allowed for personal use property unless the loss is tied to a federally declared disaster.

If the crypto was held for investment or the loss arose from a transaction entered into for profit, a theft loss may be deductible when you can show a theft occurred under applicable law, you have no reasonable prospect of recovery, and you file using Form 4684 in the year you discover the theft.

You must keep thorough records. That includes wallet addresses, transaction IDs, fair market value in US dollars at key dates, police or regulator reports, and correspondence with platforms or insurers. Any expected or actual reimbursement reduces the amount you can deduct.

Stolen coins or NFTs

If facts establish a theft of investment property like NFTs, the deductible loss is generally your adjusted basis reduced by any expected recovery. Report your loss in the year of discovery and attach support for the amounts you claim.

Worthless coins

A sharp decline in crypto market cap is not enough to claim a deduction. If the token still trades or retains value, you usually need a sale or other identifiable event to fix the loss. Consider a bona fide sale for a nominal amount if appropriate, and retain proofs of the transaction.

Recording hacks and scams for tax purposes

Log dates, counterparties, wallet addresses, and transaction IDs. Save fair market value evidence in US dollars, law enforcement filings, and any recovery claims. In your tax software, tag the affected lots correctly so they are handled consistently across reports.

You may claim a theft loss when the loss arose from investment or profit-seeking activity, the facts meet the legal definition of theft in your jurisdiction, and you discover the loss in the tax year you claim it. The deduction is not available for personal casualty or theft losses unless the loss is related to a federally declared disaster.

Your deduction is limited to your adjusted basis, reduced by any actual or expected reimbursement. If there is a reasonable prospect of recovery, you must wait to deduct until that prospect can be evaluated, and you may need to adjust the deduction if you later recover funds.

If you qualify for a theft loss, the amount is generally your cost basis in the stolen assets minus any recovery or insurance. You cannot deduct unrealized gains, and you must reduce the loss by any reasonable prospect of recovery at the time you file.

You report the loss on Form 4684 and carry it to the appropriate schedules. Keep detailed worksheets that show how you computed crypto cost basis, how you valued the loss in US dollars, and how you accounted for reimbursements or expected recoveries.

Victims of qualified Ponzi-type schemes may use an IRS safe harbor that simplifies the theft loss calculation. The safe harbor allows you to treat a specified percentage of your qualified investment as a theft loss, then reduce by recoveries, instead of reconstructing every transaction.

The safe harbor does not apply to every scam. It has defined eligibility criteria and documentation requirements. If you do not meet them, you must rely on the general theft loss rules and compute your deduction based on actual basis and recoveries.

Reporting Ponzi scheme losses

If you use the safe harbor, compute the qualified investment, apply the permitted percentage for the discovery year, subtract any actual and expected recovery, and claim the result as a theft loss. Attach the required statements to your return and keep records of claims filed in bankruptcy, receiverships, or restitution processes.

Tax treatment depends on whether you can prove theft, whether you held the property for investment or business, and whether there is a reasonable prospect of recovery. The facts and your documentation control the outcome, so record everything and be careful with any third party that promises guaranteed recovery.

Pig butchering scams
Fraudsters pose as contacts and steer victims into fake platforms. If you can establish theft in a profit-seeking transaction and meet the requirements, a theft loss may be possible.

Account takeover
Criminals gain access to your wallet or exchange account and move funds. If you can show theft of investment property, a theft loss may be possible, reduced by reimbursements.

Fake investment sites
Fraud platforms solicit deposits and then block withdrawals. Some cases fit Ponzi-type fact patterns. Evaluate whether the safe harbor applies, and otherwise use general theft loss rules.

Romance scams
Confidence schemes that route victims into fraudulent crypto transfers. A theft loss may be possible if the legal elements of theft are met and the transaction was profit-motivated.

Rug pulls
Developers remove liquidity or abandon a project after raising funds. A theft loss may be possible if facts establish theft under applicable law. If tokens still trade, a bona fide sale can realize a capital loss.

Giveaway or recovery scams
Scammers promise multipliers or fund recovery for a fee. Treat recovery offers with extreme caution, and report incidents to the appropriate authorities.