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Deducting a Casualty or Theft Loss on Your Crypto Taxes

If you’ve lost crypto due to a wallet hack, a crypto scam, or an unexpected exchange shutdown, here's what your tax situation may look like

You've lost crypto: what can be done?

If you’ve lost crypto due to a wallet hack, a crypto scam, or an unexpected exchange shutdown, you’re probably wondering if you have any recourse for tax write offs or deductions.

Many argue that we’re just now emerging from the wild west of cryptocurrency — or that we’re still in it. Losing crypto via scams, theft, and exchange shutdowns are an unfortunate experience that many in crypto have experienced. 

How taxes work for lost crypto depends on the situation. Do you still have ownership of the coins? If so, you need to sell the coins to be able to claim a capital loss

Crypto casualty and theft losses

If you lost crypto from a situation out of your control, like you lost crypto in an exchange that shut down or you had crypto stolen in a hack, then in past years some people had used IRS Form 4684 “Casualties and Thefts.” 

However, as of the 2018 tax year, many kinds of losses were disallowed on the IRS 4684. You can now only deduct losses if they are the result of a federally declared disaster, which obviously won’t often be the case for cryptocurrency situations. Claiming theft loss on taxes for stolen crypto is no longer possible in 2018 and later. 

If you’re looking for how to handle crypto capital losses — crypto you still hold at a loss but are otherwise still in control of, read our article on crypto losses.

Acknowledging lost coins on TokenTax

Regardless of whether you can report lost coins on your taxes, it’s important that you enter in coins as lost or stolen on TokenTax. This is so that the algorithm doesn’t erroneously choose those tax lots to be sold in place of coins you actually still have under your control. 

You can enter in such coins via manual entry with the lost or stolen transaction type. 

I bought coins that turned out to be worthless. Is that a casualty loss?

If you paid for a cryptocurrency and received it, then there’s no casualty loss. You must sell or trade away the coins in order to realize a capital loss. Otherwise, you only have an unrealized capital loss. 

As is the case with lost coins, be sure to enter in the transaction where you bought the coins, even if they were useless. That way, our algorithm knows not to include that crypto in your calculations.

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