For US customers, the Tax Cuts and Jobs Act of 2017 changed the treatment of lost or stolen property for tax purposes. Since January 1, 2018, deductions for lost or stolen property are no longer allowed.
Important: CoinTracker's tax experts have created a guide on cryptocurrency tax write-offs for US customers. We recommend reviewing this guide first.
Handling stolen or lost cryptocurrency
If you need to categorize a transaction as lost or stolen in your records, you can:
- Edit the category of the transaction from Send to Lost.
- Add a Send transaction and change the category to Lost.
How to write off a cryptocurrency loss
Writing off a cryptocurrency that has become completely worthless (not just lost significant value) creates a capital loss equal to the crypto’s cost basis.
If the crypto is illiquid and cannot be disposed of, you still attempt a worthless asset deduction. This is a grey area of the tax code, so proceed cautiously.
Here are the options:
- Sell or send the asset to a third-party address to trigger a full capital loss. This is automatically registered if the coin is from a synced wallet or exchange.
- If the crypto is illiquid and cannot be disposed of, create a 'Send' transaction and edit the proceeds from the transaction to $0.00. Be sure to document this action with evidence that all attempts to dispose of the crypto were exhausted but proved unfeasible.
Note on uncommon tax write-offs
Be cautious with less common write-offs, such as nonbusiness bad debt, casualty losses, theft losses, worthless security deductions, and abandonment losses. These deductions can increase the risk of an IRS audit. Even if filed correctly, the IRS may scrutinize them due to their deviation from typical returns. The potential costs of an audit may outweigh the benefits of these deductions.
Read more about write-offs and consult a tax advisor to assess the pros and cons before pursuing these deductions.