Cryptocurrency Tax Write-Offs: 2024 Guide
If you've got losses from collapsed crypto platforms, poor investments, or theft - you may be able to claim a crypto tax write-off. Learn more in our guide.
Many investors have losses from crypto - whether that’s from poorly performing investments, collapsed platforms like FTX and Celsius, or theft. The silver lining is that, in some instances, you can utilize these losses as a crypto tax write-off in order to minimize your tax burden. We’re covering everything you need to know about crypto losses, how crypto losses are reported in your tax return, when you can claim a crypto tax write-off, and the IRS rules on different types of crypto losses.
Crypto capital losses
You have a capital loss when you dispose of a capital asset - like crypto - at a loss. Disposals include selling, trading, and spending crypto.
Example
You bought 1 BTC for $40,000 and later sold it for $30,000. You have a $10,000 capital loss.
There are two types of capital losses: short-term and long-term. A short-term capital loss occurs when you dispose of crypto you’ve held for less than a year, and a long-term capital loss occurs when you dispose of crypto you’ve held for more than a year.
Nobody likes a poorly performing investment, but these realized losses are helpful from a tax perspective as the IRS allows investors to offset an unlimited amount of capital losses against their capital gains. As well as this, if your losses exceed your gains, you can offset an additional $3,000 against your ordinary income each year. If you still have losses, you can carry these forward to offset against gains in future financial years.
How to report crypto losses to the IRS
To report your crypto capital losses, you’ll need to complete IRS Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses). Here’s how:
Gather all transaction history from your wallets and exchanges.
Calculate your gains and losses.
Fill out Form 8949 with each disposal of crypto and the subsequent gain or loss, as well as Schedule D with your net gain/loss.
You can use crypto tax calculators like Koinly to calculate your gains and losses, as well as generate Form 8949 and Schedule D easily and quickly.
What about other types of crypto losses?
Realized losses from disposals aren’t the only losses crypto investors have. From thefts to collapsed platforms and projects, there are plenty of ways your investment can go awry. When it comes to crypto tax write-offs for these losses, it’s a mixed bag on the IRS rules on whether these losses are permissible, so let’s dive into it.
Casualty & theft losses from crypto
The Tax Cuts & Jobs Act (TCJA) significantly limited the ability to deduct personal losses, including casualty and theft losses. Between January 1, 2018, and December 31, 2025, these losses are only deductible if they are due to a federally declared disaster. Shockingly, cryptocurrency-related losses typically don’t meet this requirement.
However, there are some other instances where theft losses are deductible under the current rules.
Transactions entered into for profit
Fortunately, the tax code still allows deductions for casualty and theft losses related to transactions entered into for profit (as per §165(c)(2)). However, what constitutes such a transaction is often subject to interpretation and depends on the specifics of each case. Generally, you need to have entered into the transaction primarily to make a profit, and there needs to be an actual transaction involved.
Casualty losses
Casualty losses occur when your property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event not caused by you. In the crypto world, this might include accidentally sending funds to the wrong address or losing access to your private keys (not just claiming a “boating accident”).
While technically deductible if they occur in a profit-oriented transaction, it’s often difficult to prove that these losses meet the necessary criteria. As a result, most crypto-related casualty losses aren’t deductible.
For example, if you mistakenly send crypto to the wrong wallet address, this would be a casualty loss but likely wouldn’t qualify as a deduction because the transfer wasn’t primarily profit-driven—it was intended to safeguard your assets.
Reporting deductible casualty losses
If you believe you have a deductible casualty loss, report it on Form 4684, Section B, Part II, in the year the loss occurs. Remember, you can’t claim this deduction if you expect to recover any of the lost funds through insurance or other means.
To benefit from this deduction, you must itemize your tax return or ensure that your deductible loss exceeds your standard deduction threshold. If your loss doesn’t meet these thresholds, you won’t receive any additional tax benefit.
Theft losses from crypto
Theft is defined as the unlawful taking of property with the intent to deprive the owner of it. For tax purposes, the TCJA made it so that from January 1, 2018, to December 31, 2025, only theft losses related to profit-oriented transactions are deductible.
Theft losses not related to profit-oriented transactions
Most day-to-day theft losses aren’t tax-deductible during this period because they aren’t connected to a profit-seeking transaction. For example, if someone hacks your exchange account and steals your crypto, this loss isn’t deductible because it wasn’t part of a transaction aimed at making a profit.
Theft losses related to profit-oriented transactions
However, you can argue that some crypto-related theft losses are deductible if they occur during a profit-oriented transaction. For instance:
You lose funds due to a phishing attack while trying to make a profitable investment.
You’re misled into sending funds to a scammer for a promised service or product that you never receive.
Reporting deductible theft losses from crypto
If you have a deductible theft loss, report it on Form 4684, Section B, Part II. Typically, you can deduct the loss in the year it was discovered unless you believe you’ll recover the funds, in which case you must wait until it’s clear that recovery is not possible.
Remember, you can only benefit from this deduction if you itemize your tax return or if your loss exceeds your standard deduction threshold.
It’s really important to note there are imminent changes to the tax code coming as the TCJA amendments were only temporary:
Prior to the TCJA, you could deduct theft losses regardless of whether transactions were profit-orientated.
From January 1, 2018, to December 31, 2025, you can only deduct theft losses related to profit-orientated transactions.
In January 2026 - unless anything significant changes under the new administration - these rules will expire and you’ll be able to deduct all theft losses again.
I lost my crypto in a boating accident
You’ve undoubtedly heard this line from crypto investors looking to avoid paying taxes on undisclosed transactions and wallets. It’s all fun and games until the IRS catches up with you. Deliberately concealing assets to avoid tax is illegal and has serious consequences, both financially and legally. Attempting to write off losses for such “lost” wallets can make matters even worse.
Read next: Can the IRS track crypto?
Nonbusiness bad debt deduction
A nonbusiness bad debt occurs when a debt you extended to another party, such as a cryptocurrency exchange or lending platform, becomes entirely worthless (per IRS §166(d)(2)). If your debt is deemed totally uncollectible, you can claim it as a short-term capital loss on Form 8949.
To qualify for this deduction, the debt must be completely worthless. This generally means you’ve exhausted all reasonable efforts to collect the debt, or the borrower has declared bankruptcy, making the debt legally uncollectible.
It’s important to note that this deduction only applies to debt instruments, such as loans. It does not apply to non-debt assets like stocks, commodities, or cryptocurrencies. However, if the terms of a platform like Celsius indicate that you lent your coins in exchange for yield, this could be considered a debt instrument, making it potentially eligible for the nonbusiness bad debt deduction.
As most platforms are still working on restructuring or resuming withdrawals, it’s unlikely that many debts are currently considered totally worthless. However, if a debt does become entirely uncollectible, you can deduct its original value.
Reporting nonbusiness bad debt
To report a nonbusiness bad debt, list it as a short-term capital loss on Form 8949, Part 1, line 1, and check box (C) for “Short-term transactions not reported to you on Form 1099-B.” You’ll also need to attach a bad debt statement to your tax return, detailing:
A description of the debt, including the amount and due date.
The debtor’s name and your relationship to them.
The steps you took to collect the debt.
Why you concluded the debt was worthless.
If you later recover any of the debt, you may need to include the recovered amount in your gross income.
Loss on deposits
Although nonbusiness bad debt deductions usually apply to totally worthless debt, in rare cases, they can apply to non-debt assets like deposits lost due to the bankruptcy or insolvency of a financial institution (per IRS Publication 547). The term “deposit” includes any withdrawable account or share (§165(I)(4)).
The loss on deposit deduction is somewhat obscure and can be taken in one of three ways: as a personal casualty loss, an ordinary loss from a profit-seeking transaction (capped at $20,000 for married couples), or as a nonbusiness bad debt. However, due to the Tax Cuts & Jobs Act (TCJA), the first two options are disallowed between January 1, 2018, and December 31, 2025, leaving the nonbusiness bad debt deduction as the only viable option during this period.
Applying this deduction to crypto assets lost in exchange bankruptcy or insolvency is tricky, as most crypto exchanges may not meet the definition of a “qualified financial institution.” But if your assets were lost in a qualified financial institution, you might be eligible to claim the loss as a nonbusiness bad debt.
It’s crucial to consult with a tax advisor to determine if this approach is applicable to your situation and whether it’s worth pursuing.
Reporting nonbusiness bad debt deduction for deposits
You report a nonbusiness bad debt deduction on Form 8949 as a short-term capital loss, attaching the necessary bad debt statement.
Ponzi scheme loss safe harbor
A Ponzi scheme is a fraudulent investment scam where returns are paid to earlier investors using the capital of newer investors. If you lose your crypto investment in a Ponzi scheme, you can deduct it as a theft loss since it’s related to a profit-oriented transaction.
To simplify the process for taxpayers, the IRS offers a safe harbor procedure for deducting losses from Ponzi schemes. This process bypasses the need for detailed fact-checking and ensures that your deduction won’t be challenged by the IRS if the scheme meets specific criteria.
For instance, if you were a victim of the BitConnect Ponzi scheme, you might qualify for this safe harbor deduction. Despite allegations against founders, it’s not yet clear whether this would apply to platforms like Celsius.
Read next: Celsius Bankruptcy and Tax Write-Offs Guide
Reporting Ponzi scheme losses
Report Ponzi scheme losses on Form 4684, Section C. Depending on recovery plans, you can deduct either 95% or 75% of the loss.
As with other deductions, you can only benefit if you itemize your tax return or if your deductible loss exceeds your standard deduction threshold.
Worthless security deductions for crypto
If you hold a "security" that has become entirely worthless, you may be eligible for a deduction under IRS rules (§165(g)(2)). Note that this deduction doesn’t apply to partially worthless assets.
For tax purposes, a “security” includes shares of stock, rights to stock, or bonds issued by a corporation or government. Unfortunately, coins and NFTs that have plummeted to near-zero value (like Luna) don’t qualify for this deduction. However, if certain ICO tokens classified as securities have become worthless, you could potentially claim a deduction.
Read next: Which cryptocurrencies are securities?
Reporting worthless security deductions
You can report worthless securities on Form 8949. In the “description of property” column, write “worthless security” and enter zero as the proceeds.
Abandonment losses
Certain losses may be considered abandonment losses, depending on the specifics of the situation. According to § 1.165-2, an abandonment loss occurs when non-depreciable property suddenly loses its usefulness in a business or profit-seeking transaction and is permanently discarded from use.
Abandonment losses share some characteristics with casualty losses, but they require an intentional act to discard the asset permanently. Unlike theft losses, there’s no perpetrator, and unlike capital losses, there’s no sale or exchange.
To determine if you qualify for an abandonment loss with your crypto holdings, consider the following:
Did you invest with the intention of making a profit?
Did the cryptocurrency suddenly become worthless?
Is it non-depreciable property (as all cryptocurrencies are)?
Did you permanently discard the worthless coins, such as by sending them to a null address?
If you answered “Yes” to all these questions, you might qualify for an abandonment loss. Be sure to document your answers and the actions you took, as thorough records will be crucial if the IRS questions your deduction.
Reporting abandonment losses from crypto
Report abandonment losses on Form 4797, line 10, for the year in which you permanently discarded the coins. The amount of the deduction is your original investment value.
Abandonment losses are considered ordinary losses and aren’t subject to capital loss limitations. However, because they offer significant tax advantages, the IRS may scrutinize them more closely. Proper documentation is key to defending your deduction.
Tread carefully with claiming crypto tax write-offs
It’s essential to wait for a final outcome before taking any tax write-offs. For example, users affected by the 2014 Mt Gox exchange bankruptcy are still waiting to see if they’ll recover their funds. If you prematurely deduct a loss and later receive recovery funds, those funds will be taxable in the year received.
While capital losses are more straightforward, less common write-offs like nonbusiness bad debt, casualty losses, theft losses, worthless security deductions, and abandonment losses require careful handling. Even if done correctly, these deductions can attract IRS attention. The costs of an audit might outweigh the potential tax savings, so it’s wise to consult a tax advisor to weigh the pros and cons before proceeding with these write-offs.
How does Koinly deal with lost or stolen crypto?
Koinly lets you tag any lost or stolen crypto. All you need to do is find the relevant transaction and use the tags on the right-hand side.
When you’ve tagged any lost or stolen crypto, you’ll be able to clearly see this in your tax report summary under ‘Gifts, donations & lost coins'.
Koinly doesn't recognize any gains on these transactions, but it doesn't deduct them as a loss either. You'll need to claim with your relevant tax authority to do this. Our crypto tax calculator can help you collect evidence to do this with records of your transactions, gains, and losses.
