Can you write off crypto scams? The information you find online can be murky and some are fooled by outdated information from 2017 or earlier prior to certain U.S. tax law changes which modified how investors could classify their crypto losses where applicable.
What follows is not tax advice, nor should it be taken as such–this article should be considered a primer in terms of the right questions you should consider asking a tax professional when dealing with cryptocurrency issues.
It’s important to remember that in spite of the word “currency” in the term cryptocurrency, at the time of this writing crypto like Ethereum and Bitcoin are still viewed as property under U.S. tax law rather than money or income.
That is not to say you cannot be taxed for crypto investments, it just means it is a different thing than income or currency in the eyes of the law as currently written.
What Is A Crypto Scam?
For our purposes, a crypto scam is any event that causes you to lose your virtual currency or use it in a way you did not intend, which results in a loss of your investment due to fraud. Accidents are not considered scams–and that includes accidentally sending your private keys to the wrong address or misplacing your keys and losing access to your investment.
There may be a fine line in the minds of some between out-and-out theft and scamming, but in the end, you have lost access to your coins or crypto tokens as the result of someone else’s machinations. Theft or trickery brings the same result–you lose your money.
Will the IRS allow you to recoup any of those losses when you file your taxes?
The Ability To Write Off Crypto Scams On Federal Taxes
The first thing we need to examine to answer this question is how the IRS views crypto. As mentioned above since cryptocurrency is not legal tender, but rather something described as “convertible currency”, it occupies a different status than cash.
In 2014, the Internal Revenue Service published a document to help taxpayers understand what their rights and obligations are when reporting Bitcoin or other virtual currencies. In that document, the IRS holds that since crypto is, in the eyes of the federal government, property and not cash, it could technically meet the IRS’s “theft or loss” rules.
Those rules as written did NOT apply to losing crypto keys or misplacement of them. Basically in such cases, the investor is simply forced to take the loss.
But the entire question is moot at press time since in 2017 the Internal Revenue Service was reported to have changed the rules for a specific window of time that expires in 2025. The Tax Cuts and Jobs Act of 2017 essentially says (among other things) you can’t write off the types of crypto losses discussed here, except in a federally-declared natural disaster area.
So the short answer is, unless tax laws change between now and 2025, no you cannot write off a crypto scam. Whether it has been lost or stolen you cannot claim a capital loss on your IRS tax filings.
What You Need To Know About These Crypto Tax Rules
All of the information given above applies to individual tax filers submitting their personal income tax information to the IRS. But the rules for business taxes are different in some cases and the IRS rules for reporting theft, loss, and other financial negatives (crypto and beyond) are quite different in some cases.
Businesses may be able to write off certain negatives that affect their business and any company that is primarily working in cryptocurrency should partner with a tax professional to determine which tax rules apply and which ones don’t when it comes to being hacked, loss of crypto, or other issues.
Business tax law and individual tax laws can vary greatly and are both subject to change year over year by the IRS or alterations in federal law.
If you are an individual investor and you sell crypto, that is considered a taxable event by the IRS, and all crypto investors are responsible for reporting taxable financial transactions whether there is an IRS form for that reporting or not.
If you need to know your rights and responsibilities under the law for reporting your virtual currency gains and losses for a given tax year, consult a tax professional or contact the Internal Revenue Service for assistance.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.