Although there is a legislative gap that fails to provide full tax law benefits for those who have lost money in a crypto scam, there may still be some avenues of relief. Getting help from an experienced tax professional can clarify whether and how you can take a deduction for your losses.
At Moskowitz, LLP, we help those who have suffered large losses work to claim and maximize tax benefits. Our tax attorneys and CPAs are intimately familiar with the latest interpretations and guidance coming from the Courts and IRS that may support a deduction for crypto scam losses. Learn more about how we can help you in your situation.
Moskowitz, LLP is located at 333 Bush St Floor 21, San Francisco, CA 94104, right near the Citigroup Center. Call us today at (888) 829-3325 to obtain guidance from an experienced tax preparation professional.
Clients have come to appreciate our tenacity and creative problem-solving when it comes to their tax situation. For example, Client Dave McClung writes:
“Great experience with the team at Moskowitz. Had a real mess with some back tax issues. Received excellent service from Mary and Carey who dug in and stayed with it until all issues were resolved!”
There Is a Pathway to Potentially Writing off Crypto Scam Losses
Recent drops in crypto prices are responsible for only some of the losses that investors have suffered in the industry. In 2023 alone, the FBI reported that investors lost nearly $4 billion in aggregate through crypto scams. Although those who have lost money due to market drops in value have an easier pathway to taking tax deductions for their losses, those who have suffered damages through fraud have a more difficult path. Nevertheless, it may still be possible to gain tax relief for the money that you have lost to a crypto scam.
You may be able to write off losses that you sustained in a crypto scam. However, you need to structure the deduction properly for it to pass muster with the IRS. The important thing is that you do not claim these losses as capital losses, as you would for a normal transaction. Here, you would claim crypto scam losses as similar to those that you would suffer when there is theft.
In March 2025, the IRS Chief Counsel issued an Advice Memorandum relating to the deductibility of theft losses under IRC § 165 for scam victims. Presumably, crypto scams may meet the Internal Revenue Code’s definition of theft, since there was a “criminal appropriation of another’s property to the use of the taker, including theft by swindling, false pretenses and any other form of guile.”
What Conditions Must Be Met for a Crypto Scam Tax Write-off?
This memo outlined the specific conditions that must be met in order for a crypto scam victim to claim the loss as a deduction. Specifically, the memorandum states that the following must apply to your case:
- The loss must stem from conduct that would be considered criminal under the laws of the state in which you live
- You must have no reasonable prospect of recovering the funds that you lost in the scam
- The transaction that you entered into was originally one that you made with the expectation of profiting
One key issue in crypto scams is whether you meet the prong of the test that states you have no reasonable prospect of recovery. In some cases, you may still have the chance of making a financial recovery from a third party for the loss that you have suffered.
Because so much is left to legal interpretation it is crucial for an experienced tax attorney, who is familiar with this area of law, to make the determination if your facts will qualify under this criteria.
Be Prepared for IRS Scrutiny of Your Write-off
Although the IRS heavily scrutinizes losses claimed under IRC § 165, it is still possible to take this deduction under certain circumstances. Nonetheless, this is a murky area of the law, and Congress has not yet fully legislated on this topic in spite of a wide proliferation of crypto scams, again requiring expert interpretation. Further, the IRS closely scrutinizes losses that are claimed under this section, making it even more important that you have the help of an experienced tax attorney. You can face severe consequences, such as back taxes and penalties, even perhaps criminal prosecution, if the IRS disallows your deduction under this section. On the other hand, you should take the tremendous benefit allowed under the law if you qualify. The most important part is being able to tell the difference.
From your standpoint, it is vital that you compile and maintain as much documentation about the theft and scam in case the IRS questions your deduction in the future. Make sure that you have reported the scam to law enforcement, so you have a record of potential criminal activity. It is important that you are able to give the IRS as much information as possible if they question the deduction.
When you are claiming a loss for a crypto scam, do not take it on your Schedule D. Your losses to the scam do not meet the criteria of a capital loss. The IRS is looking closely at potential “capital loss harvesting” that would allow you to offset other gains you made elsewhere. Instead, you would take this deduction on Form 4684, which covers casualties and thefts, which is actually more beneficial to you as it provides a much larger tax deduction.
Contact Our Firm for Tax Planning Help!
At Moskowitz LLP, our team of tax attorneys, enrolled agents and CPAs can assist you with tax issues related to crypto scam losses. Schedule an appointment to discuss your matter with a tax attorney and we can help structure a crypto scam tax loss deduction if you qualify. Call us today at 888-TAX-DEAL (888-829-3325) to get the tax counsel and advice you need.
