Can I Deduct Crypto Hacks and Scams from My Taxes?

Zac McClureUpdated at: Jan 7th, 2022

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. Today, only losses stemming from a federally-declared disaster may be deducted as casualties. This scenario is unlikely to apply to a crypto loss. 

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.

Nevertheless, 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 and most crypto tax softwares, 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.

Related content

To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

Learn how to save money on your crypto taxes

We’ll send you tips that smart investors use when filing their taxes

Calculate your crypto taxes now

TokenTax does the hard work so you don’t have to.