Many investors in cryptocurrencies have seen their investments lose significant value in recent months. U.S. taxpayers who have losses from their digital asset investments or have had them stolen can deduct losses.
For individual taxpayers, typically the loss from the sale of crypto assets will result in a capital loss. Capital losses can offset capital gains, both long-term and short-term, and up to $3,000 of ordinary income each year. Capital losses in a year that exceed other capital gains and the $3,000 that can be deducted against ordinary income each year are carried forward indefinitely to offset losses in future years subject to the same limitations on an annual basis.
In contrast with capital losses applicable to sales or exchanges, abandoned or worthless crypto results in ordinary losses. However, the losses are miscellaneous itemized deductions which were eliminated under the 2017 Tax Cuts and Jobs Act (“TCJA”) through the tax year 2025. Under the TCJA miscellaneous itemized deductions are not deductible for tax years 2018 – 2025. The Internal Revenue Code defines miscellaneous itemized deductions as generally all deductions other than deductions that reduce adjusted gross income, such as trade or business deductions or losses from the sale or exchange of property; deductions for interest and taxes; casualty or theft losses incurred in any transaction entered into for profit; charitable contributions; and various other limited categories. Abandonment or worthlessness losses are more useful as above-the-line deductions that reduce adjusted gross income if they are derived from a trade or business such as an initial coin offering.
Theft losses are itemized deductions that can offset an unlimited amount of ordinary income. As odd and possibly illogical as it may sound, an investor with significant losses may be better off having their digital assets stolen.
Klug Counsel PLLC and its team of crypto lawyers have represented multiple domestic and cross-border crypto funds and crypto mining ventures in providing tax-efficient structuring that involved equipment worth hundreds of millions of dollars.