Can You Write Off Crypto Hacks?
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The Tax Cuts and Jobs Act of 2017 limited individual casualty and theft deductions to federal disasters, so crypto hacks or scams are unlikely to be eligible.
However, if you still have possession of the coins, you may be able to declare them as worthless securities—with your accountant's guidance.
If you do lose funds from a hack, scam, or technical problem, you still need to record it in your crypto tax software.
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.
Stolen coins or NFTs
Donald Trump’s Tax Cuts and Jobs Act of 2017 severely restricted which events are eligible for casualty and theft deductions. 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.
Recording hacks and scams for tax purposes
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.
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Last reviewed by Zac McClure,MBA on September 8, 2022 · Sources