Can You Write Off Crypto Hacks?

Crypto hacks and scams are every investor’s worst nightmare, but sadly they are not unheard of. Neither are technical breakdowns (nor simply the human error of forgetting your private key).

When facing major losses from theft, fraud, rug pulls, and the like, traders often hope that they will find a silver lining in the tax code: at least they can deduct the losses as casualties or thefts, right? Unfortunately, if you're a U.S. tax payer, the answer is no.

Donald Trump’s Tax Cuts and Jobs Act of 2017 severely restricted which events are eligible for casualty and theft deductions.^[1] Today, only losses stemming from a federally-declared disaster may be deducted as casualties. This scenario is unlikely to apply to crypto losses. 

What’s more, tax deductions for theft were removed altogether. These provisions will remain in effect until at least 2025. 

If you still have possession of tokens, but they have become illiquid because of a rug pull (or another scenario), the safest way to realize losses is to sell them on an exchange or in an over-the-counter arm's length transaction. We write more about how to do so in our blog on NFT tax loss harvesting.

However, there is discussion among crypto tax professionals that in this case, you may be able to deduct your loss as a worthless security. Although cryptocurrency is not officially considered a security, many have argued that a large number of digital assets fit the definition of a security. We recommend speaking to a crypto tax accountant and/or attorney if you are considering deductions for worthless securities.

You should record frauds, rug pulls, and losses in your crypto tax software so that the algorithm doesn't include those tax lots in any specific identification accounting. On TokenTax, you can manually categorize these transactions as "lost" or "stolen." Also include the transaction details for the acquisition of the lost or stolen coins so you can account for the disposal of the crypto you used to buy them.

It's important to remain vigilant about the security of your digital assets. Use good wallet hygiene—never share your seed phrase or private key and consider using a hardware wallet, among other measures.

Here are answers to frequently asked questions about crypto hacks and whether they can be written off.

Can you report crypto scams?

Yes, you can report crypto scams. Reporting crypto scams is crucial to help protect the community and raise awareness about fraudulent activities. Platforms often have reporting mechanisms, and authorities may have dedicated channels for such incidents. In the US, If you are a victim of a crypto scam, you can file a report with the IC3 and with the FTC.

Can you write off crypto on taxes?

In the US, tax regulations regarding crypto losses have limitations. The Tax Cuts and Jobs Act of 2017 restricted casualty and theft deductions, allowing only losses from federally declared disasters to qualify. Deductions for theft were entirely removed. Therefore, deducting losses from stolen coins or NFTs may not apply to most crypto investors. When in doubt, consult with a crypto tax professional for guidance in your specific circumstances.

Is crypto monitored by IRS?

Yes, the IRS monitors crypto transactions. Cryptocurrency transactions are subject to tax regulations, and the IRS has been actively working to ensure compliance. Taxpayers are required to report their crypto activities, including gains and losses, on their tax returns.

Can crypto be used for tax evasion?

Because of crypto's decentralized nature and emphasis on privacy, people are tempted to use it to evade taxes, which is, of course, illegal and can lead to serious consequences. The IRS has been enhancing its efforts to detect tax evasion involving cryptocurrency. It is crucial for individuals to comply with tax regulations and report their crypto activities accurately to avoid legal implications.