Tax Reporting for Crypto Stolen or Lost Due to Hacks
What You Need to Know (And What the IRS Expects)
The wild world of crypto is full of promise—but also risk. Between soaring prices, innovative tech, and decentralized finance, it’s easy to get swept up in the excitement. But with great freedom comes a sobering reality: losses due to hacks, scams, or even lost private keys are part of the crypto experience for many investors.
One of the most frustrating aspects? When that loss happens, not only are your assets gone, but you're still left wondering what to tell the IRS. Can you claim those stolen coins as a deduction? Can you report them as a capital loss? Do they vanish for tax purposes like they did from your wallet?
Let’s break it down step by step.
1. What Happens When Your Crypto is Stolen or Lost?
First, understand the difference between two types of crypto "disappearances":
Theft or Hack
This typically means someone gained unauthorized access to your wallet or exchange account and drained your crypto. Think phishing attacks, exchange breaches, or smart contract exploits.
Loss
This covers situations where the crypto isn’t stolen, but you can no longer access it. This includes:
Losing your private keys or seed phrase.
Sending crypto to an incorrect address.
Malfunctioning smart contracts.
While both situations feel the same (your crypto is gone), the IRS treats them very differently.
2. How the IRS Views Crypto Losses
The IRS doesn’t always keep up with technology—but it’s very interested in how you handle your crypto.
As of the IRS's latest guidance:
Theft losses are no longer deductible for individuals unless they occur in a federally declared disaster. This change came from the 2017 Tax Cuts and Jobs Act (TCJA), which eliminated miscellaneous itemized deductions for personal casualty and theft losses through at least 2025.
Lost crypto (like lost keys) is generally not deductible. The IRS considers this a personal mishap, not an investment loss.
So what does that mean for you?
3. Can You Claim Crypto Losses on Your Taxes?
Let’s explore a few common scenarios and how to handle them.
Scenario 1: Your Wallet Was Hacked
Let’s say you had 5 ETH in a MetaMask wallet and a hacker drained it after you connected to a malicious DApp. You file a police report, contact MetaMask (they can’t recover it), and you’re left with zero ETH.
Can you claim this as a loss?
Unfortunately, no—not under current U.S. tax law.
Since this isn’t a loss from a federally declared disaster (like a wildfire or hurricane), and you're an individual taxpayer, you cannot deduct the stolen crypto. Business taxpayers might have other options (more on that below).
What to do:
Keep documentation. Even if it’s not deductible now, laws could change.
File a police report.
Screenshot wallet transactions showing the theft.
Save communications with exchanges or wallet providers.
Scenario 2: You Lost Your Private Keys
Let’s say you wrote down your recovery phrase for a wallet with 1 BTC… then accidentally threw it out during spring cleaning. Brutal.
Can you write that off?
Again, no.
The IRS doesn’t allow deductions for “negligent losses” or personal errors. This is treated like losing your own cash—not a capital loss.
What to do:
Record the loss in your own records, but do not include it on your return.
If this was tied to a business or part of theft/fraud, exceptions might apply.
Scenario 3: You Sent Crypto to the Wrong Address
Maybe you intended to send USDC to a friend, but typed the wrong wallet address or sent it to a smart contract that doesn’t support recovery. The funds are gone forever.
Can you deduct this?
Nope. The IRS doesn’t view mistakes like this as deductible losses either. It’s a personal error, not an allowable capital loss.
But What If You're a Business or Investor?
If you're running a business (like a crypto hedge fund, DAO treasury, or advisory firm), the rules are slightly different. Businesses can potentially claim theft losses as ordinary losses under Section 165 of the Internal Revenue Code.
To qualify:
You must be operating as a legitimate business or trade (not just trading personally).
You must provide strong documentation—evidence of ownership, how the loss occurred, and proof that recovery is unlikely.
Still, the IRS may push back—especially with crypto. If you're running a crypto-focused business (like CoinFlask), this is where having a strong accounting team or crypto tax advisor becomes crucial.
4. What About Capital Losses?
Now you might be wondering: “Can I just sell my lost or stolen crypto and claim a capital loss?”
Only if you can actually dispose of the asset.
If the coins are truly unrecoverable, and there’s no market to sell them, you cannot report them as sold. However, if you have tokens from a rug-pull or worthless altcoins, you might be able to trigger a capital loss in a few creative (yet compliant) ways:
Capital Loss Strategies:
Sell the tokens on a DEX for pennies. This creates a taxable event that locks in the loss.
Use a “donation” or “burn” contract (only if allowed and recognized by tax advisors).
Sell to a third party for a nominal amount (with proof).
Capital losses can offset capital gains and carry forward into future years. Just don’t try this with totally inaccessible assets (like locked tokens from a hacked wallet)—those don’t qualify unless there's a legal disposition.
5. The Importance of Documentation
Even if you can’t deduct the loss today, document everything anyway. Why?
Tax law changes. If Congress reinstates theft loss deductions for individuals, your records will be ready.
IRS audit protection. If the IRS ever asks, you’ll need to explain that sudden drop in holdings.
Insurance or civil suits. Your documentation may help in recovering funds, or at least show loss basis.
Here’s what to document:
Date of acquisition and cost basis
Date and nature of the loss
Amount and fair market value at time of loss
Supporting documentation (wallet logs, police reports, exchange statements)
Efforts to recover the assets
6. Emerging Guidance & Future Outlook
Right now, the IRS is still catching up to the nuances of DeFi, custodial risk, and user errors in blockchain. As the industry matures, we could see:
Clarity around “abandonment” losses (for truly inaccessible crypto)
Revival of personal theft loss deductions
Better tax treatment for smart contract or bridge exploits
Expanded insurance or SEC protections
Groups like Coin Center and the AICPA are actively pushing for more nuanced crypto tax policy. So while you might not be able to claim the loss now, the future could look different.
7. Final Thoughts: What Should You Do Now?
Dealing with lost or stolen crypto is already painful—don’t make it worse with bad tax reporting.
Here’s a checklist to help you move forward:
✅ If You’ve Lost Crypto:
Determine whether the event was theft, loss, or disposal.
Check if you’re eligible to deduct it (likely not unless it’s business-related).
Keep detailed documentation.
Explore capital loss realization strategies for worthless tokens.
Smart Moves:
Use reputable wallets and exchanges with 2FA.
Avoid clicking unknown links or connecting wallets to shady sites.
Back up seed phrases securely—but never store them online or in plaintext.
And most importantly—talk to a tax professional who actually understands crypto. At CoinFlask, we’ve seen too many clients misunderstand this space and leave thousands of dollars in potential tax relief (or audit risks) on the table.
TL;DR (Too Long; Didn’t Read)
Stolen or hacked crypto usually isn’t deductible unless you’re a business.
Lost crypto (like forgotten passwords or sending to wrong addresses) isn’t deductible.
Worthless coins can sometimes be sold for a capital loss.
Documentation is key—even if you can’t claim anything right now.
If you're dealing with a crypto loss, consider reaching out to a crypto-savvy tax advisor or setting up a consultation with firms like CoinFlask, where we help crypto holders navigate reporting headaches, mitigate audit risk, and prep for future tax rule changes.
DISCLAIMER: The views and opinions expressed are those of the authors and do not necessarily reflect the official policy or position of CoinFlask. Do your own research. This is not financial advice