Crypto Losses: Sales, Worthlessness, Scams, Hacks, and Exchange Failures

Losing money on crypto does not tell you what the tax loss is.

A sale, worthless token, theft, scam, and bankruptcy claim are different legal events.

Sale at a loss

If an investor buys a capital asset for $20,000 and sells it for $6,000, the sale generally produces a $14,000 capital loss, subject to the capital-loss rules.

This is the cleanest pattern because an actual disposition occurred.

Worthlessness

A token falling economically toward zero is different from selling it.

IRC §165(g) contains special rules for worthless securities. Ordinary cryptocurrency does not automatically become a §165(g) security merely because it was an investment.

For individuals, non-security investment-property worthlessness or abandonment can run into §165 and miscellaneous-itemized-deduction rules.

P.L. 119-21 amended §67(g) so the disallowance of miscellaneous itemized deductions did not simply expire after 2025 as previously scheduled.

Do not assume a worthless non-security token creates a currently deductible investment loss.

CCA 202302011

CCA 202302011 analyzed cryptocurrency that had declined dramatically in value and considered worthlessness and abandonment, including whether there was a closed and completed transaction and an affirmative abandonment act.

A Chief Counsel Advice memorandum is nonprecedential. Use it as evidence of IRS analysis, not controlling law.

Theft, hacks, and scams

Theft is a separate branch under §165, including timing under §165(e).

Calling an event a “hack” or “scam” does not automatically establish a deductible theft loss.

Relevant facts can include applicable law, profit motive, whether the taxpayer voluntarily transferred property, reimbursement rights, and reasonable prospects of recovery.

CCA 202511015 can illuminate the IRS's analysis of a particular scam pattern but is also nonprecedential.

“Hacked” can mean direct unauthorized theft, phishing, a protocol exploit, or a custodian breach. Those can produce different legal consequences.

Exchange failures and bankruptcy

A frozen exchange balance is not automatically a completed tax loss.

Determine who legally owned the assets, whether the taxpayer now has a creditor claim, whether recovery is possible, and whether the claim is sold.

If the economic property has become a bona fide debt claim, §166 can become relevant. A qualifying nonbusiness bad debt generally receives short-term capital-loss treatment when wholly worthless.

Not every failed crypto investment is a debt.

Selling a bankruptcy claim can itself create a realization event.

Rug pulls

“Rug pull” is a market term, not a tax category.

It may describe a token collapse, direct theft, fraud-induced investment, abandoned project, or theft of deposited assets.

Start with:

What property did the taxpayer lose, and how?

Wash sales

For ordinary cryptocurrency that is not independently stock or a security within §1091, the federal wash-sale rule does not apply merely because the property is digital.

Do not rewrite that as “crypto losses are immune from wash-sale rules.”

Documentation

Preserve basis, acquisition records, wallet addresses, transaction hashes, sale records, evidence of worthlessness, project/exchange communications, police reports where relevant, bankruptcy filings, recovery claims, insurance information, litigation records, abandonment evidence, and later distributions.