Taxes on Stolen, Hacked, or Lost Crypto?

How is crypto stolen?

The first thing to understand is exactly how your crypto was stolen. Many people keep large quantities of their crypto in a cryptocurrency exchange account. In such a case, hackers are capable of finding your login information and transferring funds. In the case of crypto stolen from a wallet, the strategy is exactly the same: find the password and transfer immediately. Since crypto wallets are all anonymous, it is difficult to keep track of exactly who is stealing your funds.



Do you pay taxes on stolen crypto?

Hackers have managed to steal billions of dollars’ worth of funds throughout the last decade. Crypto exchanges have been hotbeds for this type of theft. Because there are so many exchanges with lower security standards, hackers can easily enter and extract as much crypto as they can get their hands on.

If your crypto is stolen, then, is it possible to deduct the losses from your taxes? Many people assume that, since the coins were taken, they can deduct the amount they were worth from their tax report.

In most cases, however, a loss is out of the question. The IRS considers this a theft and personal casualty loss. Neither of these types of losses are tax-deductible. In other words, the IRS sees your crypto stolen as no different from a petty thief stealing a woman’s purse.

What about lost or destroyed crypto?

You cannot actually destroy a cryptocurrency. When most people ask this, they are usually talking about their wallet. It is fairly common for people to lose their crypto wallets, and thus lose access to their holdings. If your crypto wallet is lost while you are on a trip, or is destroyed, then it is the crypto wallet which has been affected- not your crypto. Either way, the IRS sees this as a personal casualty loss. It isn’t possible to claim a tax deduction on such an event!

Do you pay tax on ICO scams?

Investment losses are more of a grey area. This form of lost crypto can take on the form of Initial Coin Offering (ICO) scams. While not all ICOs are scams, they are usually extremely risky because they face immense volatility in the market. Coupled with the fact that these ICOs are not too regulated, many unscrupulous individuals use them as pump and dump schemes: they jack up the price, sell, and let the value plummet. To avoid such events, China’s central bank completely banned ICOs in 2020.

If you invest $3000 into an ICO which turns out to be fraudulent, you should note what happened in Form 8949. Note that you had a $3000 cost basis and $3000 loss, but $0 in proceeds. As long as you manage to sell, it is theoretically possible that the IRS will accept your claim, just as it would a regular capital loss claim.

Not all tax professionals agree, however. Because the IRS has not given specific guidance on these situations, it is difficult to determine the best course of action. In the end, it is safer to consult with a tax professional before making any final decisions. This way, you can get a more rounded idea of how to save money on crypto taxes.

How can you avoid crypto theft?

Recovering stolen crypto funds is incredibly difficult. Many people find it nearly impossible. As such, it is important to create a barrier between your assets and the hackers who want to steal them. The safest way to store one’s crypto is not in an exchange, but rather in “cold storage.”

Cold storage is a secure offline wallet where you can store your cryptocurrencies. The Trezor-T, for example, is a popular choice. If you transfer your crypto funds to your offline wallet, then your only job is to keep it in a safe place. As always, your seed password is the most important. Even if you lose your cold storage, you can recreate it in a new wallet with your password. Keep it safe!

If you have any other questions about crypto, talk to a Yoke Tax professional today. Let us handle the numbers while you reap the benefits.