With the ongoing crypto winter and the collapse of several cryptocurrency exchanges, many taxpayers are wondering how crypto-related losses should be reported for tax purposes. Unfortunately, there is no one-size-fits-all answer. The correct tax treatment depends largely on how and why the loss occurred.
Below are several common scenarios explained in a Q&A format, along with possible tax positions.
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My crypto holdings lost significant value due to market conditions but are still tradeable. Can I claim a tax loss without selling?
Answer: No.
For tax purposes, a loss generally must be realized through a sale or exchange. Although accounting rules may allow unrealized losses to be recognized on financial statements, tax law does not.
That said, digital assets are currently not subject to wash sale rules, unlike securities. This means you may sell the asset to realize the loss and repurchase it immediately if you wish to maintain your position.
Is my deductible loss based on the highest value my crypto ever reached?
Answer: No.
Tax losses are limited to your actual cost basis. For example, if you purchased a digital asset for $1,000, it later increased to $10,000, and you sold it for $500, your deductible loss would be $500—not the difference between the peak value and the sale price.
My exchange is frozen and undergoing liquidation. I can’t access my crypto, but the asset is still trading elsewhere. Can I claim a loss now?
Answer: Likely not.
Even if you cannot access your assets, the fact that they are still actively traded on other exchanges generally prevents the recognition of a completed transaction. You may need to wait until the liquidation process concludes and your assets become transferable again before determining any loss.
I lent my crypto to a DeFi platform for staking or lending, and the assets are now worthless. Can this loss be deducted?
Answer: Possibly.
In certain situations, the loss may qualify as a non-business bad debt, which is treated as a short-term capital loss. These losses can offset capital gains without limit, but deductions against ordinary income are capped at $3,000 per year. Any unused losses may be carried forward indefinitely. The application of these rules depends heavily on individual facts.
My crypto became worthless due to market collapse and is no longer trading. Can I claim a worthless asset deduction?
Answer: Generally no.
Digital assets are treated as property, not securities, for tax purposes. Unlike securities, crypto does not qualify for a “worthless security” deduction. A sale or exchange is typically required to recognize the loss.
An exchange holding my crypto shut down due to a hack and is now in liquidation. Can I deduct this as a theft or casualty loss?
Answer: This is a complex and evolving area.
Under current law, most personal casualty and theft losses are not deductible through 2025. If future legislation reinstates these deductions and the loss becomes fixed in that later period, a deduction may be possible at that time.
Why don’t recent exchange bankruptcies receive special IRS treatment like the Madoff Ponzi scheme?
Answer: The situations are materially different.
In the Madoff case, investors suffered direct theft losses, and tax law at the time allowed ordinary deductions for such losses. Today, theft losses are generally disallowed, and many exchange failures involve indirect losses rather than direct asset theft. Each case must be evaluated individually based on the underlying facts.
Final Note
This discussion addresses U.S. federal tax considerations only.
State tax treatment may vary, and crypto tax rules are highly fact-specific. Always consult a qualified tax professional regarding your individual situation.
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