Claiming Cryptocurrency Losses As Tax Deductions
Introduction: Crypto Bankruptcies, Custodial Accounts, Misappropriation, Hacks, and Theft
Can digital asset or cryptocurrency investors that were customers or account holders in a failed cryptocurrency business claim a deduction for their digital asset or cryptocurrency loss? So far this year there have been four notable crypto bankruptcies: (i) Celsius Network, (ii) Three Arrows Capital, (iii) Voyager Digital, and (iv) FTX and FTX.US. These crypto bankruptcies left their investors and customers with large economic losses. The primary reasons for the cryptocurrency losses were because (i) the digital asset the customer held in the account abruptly and significantly dropped in value as a result of events that precipitated the bankruptcy, or (ii) the customer’s custodially held assets disappeared through misappropriation, hacking of the platform, or were simply unaccounted for. Cryptocurrency investors and customers in this unfortunate position may be able to claim a deduction for their digital asset or cryptocurrency loss as a section 165(f) capital loss, a section 165(g)(1) worthless stock loss, or a section 165(e) theft loss.
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