How to Handle Cryptocurrency Tax Reporting When Coins Are Lost or Stolen - 2024 - FEDERAL LAWYERS [2024] (2024)

How to Handle Cryptocurrency Tax Reporting When Coins Are Lost or Stolen

Losing your cryptocurrency to theft or scams is a nightmare scenario for any crypto investor. Not only do you lose your hard-earned assets, but you’re also left wondering how to report these losses on your taxes. Can you write them off? Do you have to report stolen coins as income first? What records do you need to provide?

I totally get the confusion and frustration here. Cryptocurrency tax rules can be super confusing even in normal situations. When you add in theft and fraud, it gets even more complicated.

But don’t worry – I’ll walk you through exactly how to handle reporting lost or stolen crypto on your taxes. I’ll explain the latest IRS rules, the records you need, and how to claim deductions. My goal here is to make this as simple as possible!

Do You Need to Report Stolen or Lost Crypto to the IRS?

Let’s start with the basics: Do you even need to report stolen or lost cryptocurrency on your taxes? The short answer is yes, you should report it.

Here’s why: The IRS considers cryptocurrency to be property, meaning it is subject to capital gains taxes. If you lose cryptocurrency to theft or scams, it is still considered a disposal of property. Even though you didn’t sell it yourself, you lost possession and control of the crypto, so it is technically a taxable event.

The IRS made this clear in a 2014 notice, stating that “virtual currency is treated as property” for tax purposes. [1] So even if you didn’t intentionally “dispose” of the crypto, it is considered disposed of if lost or stolen.

The good news is that while you do have to report the stolen crypto, you can also claim a deduction for the loss in most cases, as I’ll explain shortly.

How to Calculate Cost Basis for Lost or Stolen Crypto

To claim a loss deduction for stolen cryptocurrency, you first need to calculate your cost basis. This is the amount you paid initially to acquire the crypto.

For example, say you purchased 1 Bitcoin in 2018 for $10,000. Then in 2022 your Bitcoin was stolen from an exchange hack. Your cost basis would be $10,000 – that’s the amount you paid for the 1 BTC originally.

If you purchased the same cryptocurrency at different times and costs, you’ll need to use the FIFO (first in, first out) method to determine the cost basis of the stolen coins. [2]

So make sure to dig up your original purchase records, transaction histories, and exchange statements to properly document the cost basis of any stolen coins.

How to Claim a Loss Deduction for Stolen or Lost Crypto

Once you’ve calculated your cost basis, you can claim a capital loss deduction by reporting the loss on IRS Form 8949. This gets attached to Schedule D of Form 1040.

You’ll list each stolen cryptocurrency transaction separately, along with the fair market value on the date it was lost or stolen. The difference between your cost basis and the fair market value equals your capital loss amount.

For example, say you paid $5,000 originally for 2 ETH back in 2019. In 2022, those 2 ETH were stolen when worth a total fair market value of $7,000. You would report the theft of 2 ETH on Form 8949, list the $5,000 cost basis, and the $7,000 market value. Your capital loss amount would be $2,000.

You can claim up to $3,000 of capital losses each year to offset ordinary income. Any remaining losses carry forward to future tax years. [3]

So make sure to hold onto records proving you purchased the cryptocurrency originally, as well as the market value on the date it was stolen or lost. The IRS may request these records to verify your losses.

Special Rules for Victims of Crypto Theft & Scams

Normally the process above is all you need to claim tax deductions for stolen cryptocurrencies. However, there are some special rules and limitations to be aware of if you were the victim of theft or fraud.

Since 2017, there have been new limits on claiming casualty and theft losses on individual tax returns. This was part of the Tax Cuts and Jobs Act. [4]

Now, victims of theft or scams can only claim a loss if it is attributed to a federally declared disaster. For crypto theft not related to a declared disaster, losses can no longer be deducted.

These special disaster loss rules are in place from 2018 through 2025. So for any crypto lost or stolen during this period, individual taxpayers likely won’t get a deduction unless related to a declared disaster.

There are a couple exceptions, however. You may still be able to claim losses if the crypto theft qualifies as a trade or business loss instead of a personal casualty loss. But this has strict rules, so consult a tax pro if you believe your case qualifies. [4]

You can also claim a loss if your stolen cryptocurrency was held by a bankruptcy or insolvency trustee. For example, if you had crypto with Mt Gox or QuadrigaCX when they became insolvent. [5]

Records Needed to Report Lost or Stolen Crypto

As mentioned earlier, the IRS may request records to validate any cryptocurrency losses you claim. Here are some of the main documents you should keep handy:

• – Purchase receipts showing the date you acquired the crypto and the purchase price (cost basis)
• – Exchange records and transaction histories detailing your crypto purchases and holdings
• – Private crypto wallet records proving you owned the lost coins
• – Police reports or other theft records (if applicable)
• – Insolvency or bankruptcy trustee records (if applicable)
• – Fair market value of the lost crypto on the date it was stolen or lost

Reconstructing these records may be a headache if you weren’t keeping careful track. But do your best to gather what you can to substantiate your claimed losses.

How to Avoid Crypto Theft and Scams

The best way to handle lost cryptocurrency is to avoid losing it in the first place! While that may sound obvious, there are steps every crypto investor should take to keep their assets more secure:

• – Use a hardware wallet like Ledger or Trezor to store most of your crypto offline.
• – Be cautious of crypto scams and phishing attempts.
• – Only download apps and software from trusted, verified sources.
• – Use unique, complex passwords for each exchange and wallet.
• – Enable 2-factor authentication (2FA) wherever possible.
• – Keep devices updated and use antivirus software.

No security is perfect, but following best practices greatly reduces your risk. Educate yourself on how cryptocurrency scams operate so you can recognize the warning signs.

And never store large amounts on exchanges long term – withdraw to your own secure wallet instead.

The Bottom Line

Reporting stolen or lost cryptocurrency on your taxes can be a big pain. But properly documenting your losses is key to claiming deductions and offsetting gains.

Be sure to maintain thorough records, calculate your cost basis, report losses on Form 8949, and attach to Schedule D. Victims of theft may face special limitations thanks to recent tax law changes.

While preventing crypto theft in the first place is ideal, taking these steps will help you maximize write-offs if you do suffer losses. Just be sure to consult a tax pro regarding your specific situation.