Introduction
The IRS has issued new guidance on how taxpayers can claim losses from worthless or abandoned cryptocurrency under IRC Section 165. According to IRS Memo 202302011, investors cannot deduct losses simply because the value of their cryptocurrency has dropped—there must be a specific event such as abandonment or a completed transaction.
Understanding how to properly report worthless cryptocurrency losses is essential for taxpayers looking to minimize tax liabilities while remaining IRS-compliant.
Can You Deduct Cryptocurrency Losses on Your Tax Return?
Yes, taxpayers can deduct losses from cryptocurrency investments that have become worthless or have been abandoned. However, there are specific requirements that must be met.
Requirements for Deducting a Cryptocurrency Loss
To qualify for a tax deduction, the loss must:
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Result from a specific, identifiable event.
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Occur within the current tax year.
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Be part of a completed transaction, such as a sale, exchange, or abandonment.
A decline in value alone does not qualify for a deduction.
How Does the IRS Determine If a Cryptocurrency Is Worthless?
The IRS assesses whether a cryptocurrency is truly worthless based on objective evidence, such as:
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No remaining market activity (i.e., delisted from all exchanges).
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No liquidity—the asset cannot be sold or exchanged.
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No development or project activity, signaling total collapse.
If the cryptocurrency still trades on any exchange, even at a low price, it may not meet the IRS definition of worthlessness.
How Are Crypto Losses Treated for Tax Purposes?
Cryptocurrency is classified as a capital asset by the IRS. If a loss qualifies under IRC Section 165(a) due to abandonment, it is treated as a capital loss.
Capital Loss Deduction Limits
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Up to $3,000 of net capital losses can be deducted per tax year ($1,500 for married filing separately).
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Excess losses can be carried forward indefinitely to offset future gains (IRC Section 1212).
Claiming a Loss from Abandoning Cryptocurrency
To claim a loss due to abandonment, the taxpayer must:
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Intend to abandon the asset.
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Take an affirmative action to discard it permanently.
What Qualifies as an Affirmative Act of Abandonment?
A taxpayer must take clear, deliberate action to show they have discarded the cryptocurrency. Examples include:
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Sending tokens to an unrecoverable address (burn address).
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Deliberately deleting private keys with no backup.
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Signing an on-chain transaction indicating irreversible disposal.
Simply not using the asset or allowing it to lose value is not enough to qualify as abandonment.
Conclusion
Taxpayers looking to claim losses on worthless or abandoned cryptocurrency must ensure they meet IRS guidelines and can provide clear evidence of a completed transaction or affirmative abandonment. Proper record-keeping and strategic tax planning can help maximize tax savings while ensuring compliance.
Block3 Finance assists investors in properly reporting crypto losses, maximizing capital loss deductions, and ensuring IRS compliance for digital asset taxation.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
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