2022 has been quite the year for crypto theft, scams, and lost or locked up coins. With the collapse of Celsius and Voyager, there are record millions of crypto investors that have now been exposed to fraudulent activity, or simply had their coins locked up by an insolvent lender or exchange. For crypto holders exposed to this kind of activity and scammed out of their crypto, how can you report this on your taxes? Some of the losses are deductible on your taxes, so let's dive into how to report this stolen crypto on your taxes.
Lost Crypto: Can you deduct and report it?
No. Unfortunately for users that have missent or lost keys to their crypto, the IRS's current rules do not allow for you to report this lost value on your taxes. Specifically, the IRS states that for individuals that are victims of casualty or theft losses, the losses are only deductible if they are directly attributable to a federally declared disaster.
The above rule applies through tax year 2025, meaning that unless you lost your hard wallet in a hurricane, then unfortunately in the IRS is fairly strict about what you can claim in this case.
Stolen Crypto: Deductible?
No. Unfortunately, due to the 2017 Tax Cuts and Jobs Act, the ability for US Taxpayers to claim deductions for losses through theft was eliminated.
Digital currencies are particularly at risk of being stolen in the current decentralized and unregulated ecosystem. If you stay on top of industry news, then it seems like there's news of stolen crypto about every week. There are roughly three main ways that crypto is stolen:
Malware: when hackers use a virus or malware to steal private keys or login information from a user's device.
Physical theft: When physical devices or wallets are stolen.
Exchange hacks: when crypto exchanges are infiltrated directly, giving access to the crypto to bad actors that are able to move the digital assets into their own accounts.
Scams: Are these losses deductible?
Yes. Cryptocurrency scams are deductible by filing the loss on Form 8949, which is then reported on IRS Form 1040, Schedule D. Scams can happen in a multitude of ways, but are generally referred to as "rug pulls" in the space.
Crypto scams are different from the other loss types because they involve some form of direct investment into a scam coin, usually through an ICO, or initial coin offering. Because scams involve this direct investment in an asset that falls in value, the loss becomes deductible, just like any other loss you might incur in the crypto space from more respected and established coins, like Bitcoin or Ethereum.
For scam losses, you can deduct them directly against any capital gains you incurred in a given tax year. If you have more losses than gains, you can use scam losses to offset up to $3000 of income in a given tax year. If you have even more than these thresholds, then you can carry forward the losses to future tax years indefinitely.
To file crypto gains, you'll want to use an automated crypto tax calculator to file form 8949.
Protecting yourself against crypto losses
It's no secret that the cryptocurrency markets are highly volatile. Prices can swing wildly up and down, and investors can lose a lot of money if they're not careful.
There are a few things you can do to protect yourself against crypto losses.
First, don't invest more money than you can afford to lose. Cryptocurrencies are a risky investment, and there's always the chance that you could lose all of your money. If you can't handle the thought of losing your investment, then you shouldn't invest in cryptocurrencies.
Second, diversify your portfolio. Don't put all of your eggs in one basket. Invest in a variety of different cryptocurrencies so that you're not putting all of your eggs in one basket.
Third, don't panic sell. If the market starts to tank, don't sell your cryptocurrencies in a panic. The prices will likely rebound, and you don't want to miss out on that.
Fourth, use stop-loss orders. A stop-loss order is an order to sell your cryptocurrency when it reaches a certain price. This can help you limit your losses if the market takes a turn for the worse.
Finally, stay up-to-date on the latest news and developments in the cryptocurrency market. Prices can be influenced by news and events, so it's important to stay informed. By following these tips, you can help protect yourself against crypto losses