Reporting Stolen Or Lost Cryptocurrency For Tax Purposes

Take 'em up, take 'em out, bring 'em out dead (dead)

Shine 'em up, shine 'em up, shine a bald head (head)

One gun, two gun, three gun, four

You're mine, it's all about crime


-Throw Ya Gunz by Onyx

When I was a teenager, I got robbed for my hat in person. Oh, the joys of growing up in New York City! I felt so ashamed and violated. Now in my 30s, I can’t imagine how it must feel to have your cryptocurrency stolen from you. I know it will hurt you mentally but I’m not a psychologist. Therefore, I will write about the tax implications of lost or stolen cryptocurrencies. First, let’s go over three heartbreaking but common ways to lose your cryptocurrencies. First way can be when a computer hacker obtains access to your cryptocurrency wallet and withdraws the funds from the hacked wallet. The second way can be when you invest in an Initial Coin Offering (ICO) which turns out to be fraudulent. The third way can be when you invest in a Crypto Ponzi scheme, such as fraudulent investment in a high yield product. I know all three ways are painful, but lets’ talk about what you need to know about possibly deducting the losses.

It is always good to know how the IRS defines terms before researching if an event or transaction is deductible

IRS definition of Casualty (source: Publication 547)

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

• A sudden event is one that is swift, not gradual or progressive.

• An unexpected event is one that is ordinarily unanticipated and unintended.

• An unusual event is one that isn’t a day-to-day occurrence and that isn’t typical of the activity in which you were engaged.

Casualty losses are deductible during the tax year that the loss is sustained. This generally is the tax year that the loss occurred. However, a casualty loss may be sustained in a year after the casualty occurred.

IRS definition of Theft (source: Publication 547)

Theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. You don’t need to show a conviction for theft.

Theft includes the taking of money or property by the following means:

• Blackmail.

• Burglary.

• Embezzlement.

• Extortion.

• Kidnapping for ransom.

• Larceny.

• Robbery.

The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.

The bad news….

Common cryptocurrency theft losses include stolen coins, hacked wallets and hacked exchange accounts. However, personal casualty and theft losses of an individual sustained in a tax year beginning after 2017 are deductible only to the extent they’re attributable to a federally declared disaster. The loss deduction is subject to the $100 per casualty and 10% of your adjusted gross income limitations. In the case of cryptocurrency, anytime you negligently lose your cryptocurrency, it would be a casualty that is not deductible for tax purposes.

The horrible news…..

There were many differing opinions on the proper treatment of ICO scams. The IRS has not come up with a definite rule on how to treat ICO scams for tax purposes. It is all just a guessing game at this point. Some accountants say that you can treat it as stolen which is a personal casualty loss that wouldn’t qualify for 8949. While some other accountants may say treat it as a capital loss for a capital investment. Who knows, maybe the IRS will finally stop all our guessing and give us the guidance soon. In the meantime, I recommend playing it safe.

The sort of good news….

While a theft loss related to personal-use property cannot be claimed in 2018 through 2025 unless the result of a federally declared disaster, a theft loss of investment property continues to be deductible as an itemized deduction. Reporting your lost cryptocurrency as an investment loss is the only approach that allows a tax deduction. The capital loss deduction lets you claim losses on investments on your tax return, using them to offset income. You calculate and claim the capital loss deduction by using Schedule D of your Form 1040 tax return. As always, be conservative in your approach. The IRS is still trying to figure out crypto tax rules and regulations.

Good resources for more information regarding Casualty, Disaster, and Theft Losses

IRS Topic №515:

About Form 4684, Casualties and Thefts:

Publication 547:

Need help with your crypto taxes? Well, contact Jamaal "Crypto J" at!




IG: @36chamberscryptotaxes

Twitter: 36cryptotaxes

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