Lost or Stolen Crypto: When a Theft or Scam Loss Is Deductible

Losing crypto to a thief is bad enough. Learning that the loss may not be deductible feels like a second theft. Whether you can deduct it depends less on how much you lost than on why the money moved and what you were trying to do with it.

In early 2025 the IRS Office of Chief Counsel released CCA 202511015, the most detailed IRS analysis yet of scam losses, including crypto investment scams. It is not precedent and cannot be cited as such, but it shows how the IRS reads the statute. Here is the framework.

The statute

Section 165(a) allows a deduction for losses sustained during the year and not compensated by insurance or otherwise. For individuals, section 165(c) limits that to three kinds of losses:

• losses incurred in a trade or business;
• losses incurred in any transaction entered into for profit, though not connected with a trade or business; and
• losses of property not connected with a business or a profit transaction, if they arise from fire, storm, shipwreck, other casualty, or theft.

The third category, personal casualty and theft losses, is now tightly limited. Section 165(h)(5), as it reads today, allows a personal casualty loss for taxable years beginning after December 31, 2017, only to the extent attributable to a federally declared disaster or a state declared disaster, or to the extent of personal casualty gains. The original version of that limit was set to expire after 2025. As amended, the statute no longer contains an end date. For most personal thefts, then, there is no deduction.

That makes the second category the one that matters. A theft loss in a transaction entered into for profit is not subject to the personal casualty limit.

What CCA 202511015 concluded

The memorandum analyzed five scam victims who discovered their losses in 2024, reported them to law enforcement and their financial institutions, and were told there was little or no prospect of recovery.

• A compromised account scam, where the victim moved funds to new accounts at an impostor's direction to protect them. Deductible: the motive was to safeguard and reinvest.
• A pig butchering scam, where the victim invested in a fake crypto platform that showed fictitious gains. Deductible: the transfers were investments.
• A phishing scam, where the thief took funds from investment accounts without authorization. Deductible: the stolen property was held for investment.
• A romance scam, where the victim sent money to help a supposed partner. Not deductible: no profit motive.
• A kidnapping scam using a cloned voice. Not deductible: no profit motive.

The line is motive. Where you transferred funds to invest or protect an investment, or where investment property was taken without your authorization, the loss can be a section 165(c)(2) theft loss. Where you sent money for personal reasons, even under false pretenses, it is a personal loss and generally disallowed.

The memo also notes that theft losses under section 165(c)(2) and (3) are not miscellaneous itemized deductions, so the suspension of those deductions does not apply to them.

Variations the memo addressed

Two footnotes in the memo matter for crypto. First, scammers often have victims convert funds to cryptocurrency or gold as an intermediate step before the funds disappear. The memo says that intermediate step does not change the analysis. Second, a romance scam that turns into an investment pitch, where the scammer builds a relationship and then steers the victim into a fraudulent investment platform, is analyzed like the pig butchering investment scam, not like the purely personal romance scam. The question is always what the victim was trying to do with the money when it moved.

Theft, timing and recovery

To be a theft loss, the taking must be a theft under applicable state law, which the memo describes broadly, citing Rev. Rul. 2009-9: any criminal appropriation of another's property, including theft by swindling, false pretenses and any other form of guile.

Section 165(e) treats a theft loss as sustained in the year you discover it. But no deduction is allowed in a year in which there is still a reasonable prospect of recovery. If you have a bona fide claim, an active recovery process, or insurance, the deduction may have to wait until it becomes reasonably certain whether you will be reimbursed. The memo concluded the victims' losses were deductible in the discovery year because recovery was unlikely.

How much you can deduct

The deduction is limited to your adjusted basis in the stolen property, not its value. If you bought crypto for $40,000 and it was worth $100,000 when stolen, the deductible loss is $40,000. You cannot deduct gains you never reported. Fake profits displayed on a scam platform are not basis.

The memo also addressed retirement funds: where victims took distributions from traditional IRAs and sent them to scammers, the distributions were taxable, which gave the victims basis in the stolen funds for computing the loss.

Where it goes on the return

The memo says a theft loss from a transaction entered into for profit is reported on Form 4684, Section B, Business and Income-Producing Property. See where to report crypto.

The Ponzi safe harbor usually does not fit

Rev. Proc. 2009-20, as modified by Rev. Proc. 2011-58, provides a safe harbor for losses from specified fraudulent arrangements, commonly Ponzi schemes. The memo concluded none of the five victims qualified. Most scams do not involve a lead figure who reports fictitious income to investors and pays some investors with others' money, and even where a scam arguably did, the safe harbor requires that the lead figure be charged by indictment, information or criminal complaint. Anonymous scammers are rarely charged.

Lost private keys

A lost key is not a theft. Nobody appropriated your property; you lost access to it. The IRS has not issued guidance on lost keys. A loss of access might be argued as a casualty, but personal casualty losses face the same section 165(h)(5) limit as personal thefts. And a profit-motivated loss that is not a theft or casualty is a section 165(c)(2) loss that, for individuals, falls under the miscellaneous itemized deduction rules. Section 67(b)(3) excludes only casualty, theft and wagering losses from that category, and section 67(h), as amended in 2025, disallows miscellaneous itemized deductions for taxable years beginning after December 31, 2017, with no end date. The result: lost keys usually produce no deduction. See worthless crypto tokens for the same analysis applied to collapsed tokens.

Hacks of exchanges and wallets

When an exchange or wallet is hacked and your investment crypto is taken without authorization, the phishing analysis in CCA 202511015 is the closest fit: investment property stolen without your authorization points to a profit-motivated theft loss. But exchange hacks often come with recovery efforts, bankruptcy proceedings or reimbursement programs, which can create a reasonable prospect of recovery and delay the deduction. See the existing guide on bankrupt exchange tax consequences.

What to document

• Police and FBI or other law enforcement reports, with dates.
• Communications with the scammer, the platform and your financial institutions.
• Proof of what you transferred: transaction hashes, bank records, exchange records.
• Your basis in what was transferred.
• Evidence of your motive at the time: investment pitches, platform screenshots, account statements.
• Responses about recovery prospects, insurance claims and any reimbursement programs.

If you discover the theft in one year but learn only later that recovery is hopeless, the timing rules can push the deduction into the later year. Keep the dated correspondence that shows when the prospect of recovery ended.

The facts that decide deductibility are motive and recovery. Document both while they are fresh. And if the scam involved someone claiming to be from the IRS or demanding tax payments, see the existing guide on crypto tax scams.

Frequently asked questions