Regrettably, scams are much too prevalent in the cryptocurrency area. Last week, hackers broke into Twitter’s approaches and lured innocent people to sending bitcoin into the scammer’s speech. Since CNBC reports, searchers obtained 400 payments at $121,000. It’s reasonable to ask whether sufferers of this Twitter scam or of additional First Coin Offerings (ICOs) or exchange leave scams could claim deductions on their tax forms.
What’s A Theft reduction?
In accordance with the IRS “a theft is the removal and taking of cash or property with the intent to deprive the owner of it.” Since cryptocurrencies are treated as property per IRS Notice 2014-21, a loss of cryptocurrency due to a scam an exchange hack meets the IRS theft loss criteria (sending cryptocurrency to an incorrect address or misplacing your of private keys by mistake is not theft). The amount of loss eligible for the deduction is the difference between the fair market value (FMV) at the time of the loss vs the FMV after the loss. For example, if you had sent 05 BTC to the Twitter bitcoin scammer and at the time you sent it it was worth $5,000, your theft reduction for tax purposes is $5,000.
The Deductibility Of Theft Losses
Having a personal theft reduction does not necessarily mean you can deduct it on your tax forms into get a tax benefit. The deductibility of theft losses depends on factors such as when and where they occurred and the nature of the loss.
Prior to January 1, 2018, Personal theft losses were deductible on your tax return on Form 4684 & Schedule A subject to some limitations. As a result of The Tax Cuts and Jobs Act (TCJA), between January 1, 2018 and December 31, 2025, you can only deduct theft losses attributed to federally declared disaster areas. Therefore, unfortunately, crypto scams incurred on your personal crypto accounts during this period are not deductible on your tax forms.
Losing The Tax Write-off May Not Be Detrimental
The tax code only allows you to write-off a portion of your theft loss as opposed to the full amount. To arrive at the deductible amount, $100 plus 10% of your Adjusted Gross Income (AGI) is subtracted from your full theft loss. For example, imagine Mary has a $5,000 crypto scam loss and her AGI is $100,000. Her deductible theft loss would be $3,900 ($5,000 – $100 – ($100,000 * 10%)).
Furthermore, since most taxpayers do not itemize on their tax return, in order for you to get an actual tax benefit from a crypto scam loss, the total loss would have to roughly exceed $12,400 for single filers and $24,800 for married filing joint filers. Thus, in many cases, being able to claim or not claim crypto scam losses will not make a difference.
With that said, business theft losses are still deductible. For example, if a crypto mining company which runs as a “Trade or business” loses coins to scammers, they will be able to deduct that loss on their business tax return.
Disclaimer: this post is informational only and isn’t intended as tax advice. By way of tax advice, please consult with a tax professional.