Cryptocurrency scams and deduction on tax forms

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Unfortunately, scams are too common in the cryptocurrency world. Last week, hackers broke into Twitter’s systems and deceived some people into sending bitcoin into the scammer’s address. As CNBC reports, scammers received 400 payments totaling $121,000.  Victims of cryptocurrency scams such as Twitter scam or of other Initial Coin Offerings (ICOs) or exchange exit scams can claim deduction on tax forms.
According to the IRS “a theft is the taking and removal of money 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 or an exchange hack meets the IRS theft loss criteria (sending cryptocurrency to a wrong 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.
Having a personal theft loss does not necessarily mean you can deduction on your tax forms to get tax benefit. The deductibility of theft losses depends on factors such as time place of the theft 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 cryptocurrency scams incurred on your personal cryptocurrency accounts during this period are not deductible on your tax forms.
The tax code only allows you to write-off a portion of your theft loss and not the full amount. To arrive at the deductible amount, they subtract $100 plus 10% of your Adjusted Gross Income (AGI) from your full theft loss.
Additionally, since most taxpayers do not itemize on their tax return, in order for you to get an actual tax benefit  from a cryptocurrency scam loss, the total loss would have to roughly exceed $12,400 for single filers and $24,800 for married filing joint filers. As a result, in many cases, being able to claim or not claim cryptocurrency scam losses will not make a difference.
With that said, business theft losses are still deductible. For example, if cryptocurrency scams occurs for a miner whose company is as a “Trade or business” , they will be able to ask for deduction the loss on their business tax return.

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