Taxation of Cryptocurrency-Related Losses; When & How to Deduct Them

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The overall market capitalization of crypto assets dropped below $1 trillion from its November 2021 peak of $3 trillion. With recent events like the collapse of Terra Luna & TerraUSD (UST) coins, and Celsius, Voyager, and other platforms pausing withdrawals, many crypto users are wondering what their options are for taking tax write-offs.

This course will cover the mechanics of various types of tax losses (capital losses, nonbusiness bad debt, casualty losses, theft losses, Ponzi losses, worthless security, abandonment losses) and how they may be applied to cryptocurrency-related transactions.

Learning Objectives:

  • Accurately identify & categorize various types of losses related to cryptocurrency transactions.
  • Understand the tax implications of those transactions.
  • Evaluate the pros & cons and best practices for deducting losses on your tax return. 
  1. Introduction
  2. Agenda 00:03:16
  3. State Of The Market 00:05:31
  4. State Of The Market Cont’d 00:05:30
  5. Tax Overview 00:07:42
  6. Tax Losses In General 00:09:42
  7. Capital Losses 00:12:11
  8. Capital Losses - Examples 1 & 2 00:14:03
  9. Capital Losses - Example 3 00:16:07
  10. Capital Losses - Sample Reports 00:18:42
  11. Advantages Of Using CoinTracker.io 00:19:17
  12. Tax forms 00:20:06
  13. Nonbusiness Bad Debt Deduction - Total and Debt 00:21:06
  14. Nonbusiness Bad Debt Deduction - Analyze 00:22:23
  15. Nonbusiness Bad Debt Deduction - Treatment And Reporting 00:23:19
  16. Casualty & Theft Losses 00:24:39
  17. A Transaction Entered Into For A Profit 00:26:16
  18. Casualty Losses 00:28:24
  19. Casualty Losses - Deductibles 00:29:44
  20. Casualty Losses - Deductions And Reporting 00:31:36
  21. Theft Losses 00:33:03
  22. Theft Losses - Is It A Deductible Theft Loss? 00:34:34
  23. Theft Losses - Example 00:35:44
  24. Theft Losses -  Deductions And Reporting 00:37:27
  25. Ponzi Losses 00:38:36
  26. Worthless Security Deduction 00:41:49
  27. Worthless Security Deduction - Example 00:42:51
  28. Abandonment Losses 00:45:06
  29. Abandonment Losses (Good Example) 00:47:39
  30. Abandonment Losses (Bad Examples 1 -2 ) 00:51:11
  31. Abandonment Losses (Bad Examples 3) 00:54:10
  32. Best Practices 00:56:53
  33. Speaker Closing 00:59:43
  34. Presentation Closing 01:00:36
  • Shehan Chandrasekera, CPA

    Shehan Chandrasekera, CPA

    Shehan is one of the handful of CPAs in the country who is an operator and conceptual subject matter expert on cryptocurrency taxes. Prior to CoinTracker, Shehan co-founded and worked for several regional and national public accounting firms for several years. His ability to dissect the tax code and [...]

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IRS Credit

Preparer Tax Identification Number
  • Abandonment Losses  00:45:33, 00:55:59
  • Asset 00:09:33, 00:13:32, 00:54:39
  • Bitcoin 00:05:14, 00:16:44
  • Capital Losses 00:10:35, 00:12:11, 00:16:29, 00:53:59, 00:55:44
  • Casualty Losses 00:03:50, 00:24:44, 00:28:24, 00:32:16, 00:55:50
  • Cryptocurrency 00:03:29, 00:09:20, 00:19:46
  • FIFO 00:19:17
  • Form 1099-B 00:19:49, 00:20:36
  • Form 4684 00:31:51
  • Form 4797 00:55:12
  • Form 8949 00:20:13, 00:23:33
  • HIFO 00:19:17
  • IRS Notice 2014-21 00:08:37
  • LIFO 00:19:17
  • Ponzi Loss 00:03:52, 00:38:38, 00:55:56
  • Rev. Rul. 2019-24 00:08:46
  • Tax Cuts and Jobs Act 00:10:16, 00:25:07
  • Theft Losses 00:03:50, 00:24:44, 00:33:03, 00:55:50

Abandonment Losses: An abandonment loss is “a loss incurred in a business or in a transaction entered into for profit andarising from the sudden termination of the usefulness in such business or transaction of anynon-depreciable property, in a case where such business or transaction is discontinued or where suchproperty is permanently discarded from use therein, shall be allowed as a deduction under section165(a) for the taxable year in which the loss is actually sustained.”

Asset: Property owned by a person or company, regarded as having value and available to meet debts, commitments or legacies.

Bitcoin: Bitcoin is a cryptocurrency. It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.

Capital Losses: A capital loss occurs when there is a “sale or exchange” of a “capital asset” at a loss.

Casualty Loss: A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty doesn't include normal wear and tear or progressive deterioration.

Cryptocurrency: A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a digital ledger or computerized database using strong cryptography to secure transaction record entries, to control the creation of additional digital coin records, and to verify the transfer of coin ownership.

FIFO: FIFO and LIFO accounting are methods used in managing inventory and financial matters involving the amount of money a company has to have tied up within inventory of produced goods, raw materials, parts, components, or feedstocks.

Form 1099-B: Proceeds From Broker and Barter Exchange Transactions is an Internal Revenue Service (IRS) tax form that is issued by brokers or barter exchanges. The form lists the gains or losses of all broker or barter exchange transactions.

Form 4684: Attach Form 4684 to your tax return to report gains and losses from casualties and thefts.

Form 4797: Use Form 4797 to report: , The sale or exchange of property, The involuntary conversion of property and capital assets, The disposition of noncapital assets, The disposition of capital assets not reported on Schedule D, The gain or loss for partners and S corporation shareholders from certain section 179 property dispositions bypartnerships and S corporations,The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less, orGains or losses treated as ordinary gains or losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f).

Form 8949: Use Form 8949 to report sales and exchanges of capital assets. Form 8949 allows you and the IRS to reconcile amounts that were reported to you and the IRS on Forms 1099-B or 1099-S (or substitute statements) with the amounts you report on your return.

HIFO: Highest in, first out (HIFO) is a method of accounting for a firm's inventories wherein the highest cost items are the first to be taken out of stock. HIFO inventory helps a company decrease their taxable income since it will realize the highest cost of goods sold.

IRS Notice 2014-21: This notice describes how existing general tax principles apply to transactions usingvirtual currency. The notice provides this guidance in the form of answers to frequentlyasked questions.

LIFO: LIFO stands for “Last-In, First-Out”. It is a method used for cost flow assumption purposes in the cost of goods sold calculation. The LIFO method assumes that the most recent products added to a company’s inventory have been sold first. The costs paid for those recent products are the ones used in the calculation.

Ponzi Loss: Under the IRS rules, an investor in a Ponzi scheme is entitled to deduct his or her losses as a theft loss, instead of a capital loss from an investment. This is good for the investors because the deduction for capital losses from investments is normally limited to a maximum of $3,000 per year.

Rev Proc 2014-42: This revenue procedure provides guidance regarding a new, voluntary AnnualFiling Season Program designed to encourage tax return preparers who are notattorneys, certified public accountants (CPAs), or enrolled agents (EAs) to completecontinuing education courses for the purpose of increasing their knowledge of the lawrelevant to federal tax returns. In addition, this revenue procedure modifies andsupersedes Revenue Procedure 81-38, 1981-2 C.B. 592, regarding limited practicebefore the IRS by individuals who are not attorneys, CPAs, or EAs.

Tax Cuts and Jobs Act: The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub.L. 115–97, is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs Act, that amended the Internal Revenue Code of 1986.

Theft Losses: A theft is the taking and removal of money or property with the intent to deprivethe owner of it. The taking must be illegal under the law of the state where itoccurred and must have been done with criminal intent.

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Frequently Asked Questions

Cryptocurrency capital losses arise when a taxpayer sells or exchanges crypto assets for less than their cost basis. The IRS treats cryptocurrency as property, so the same capital gain and loss rules that apply to stocks and real estate apply to crypto. Short-term losses (assets held one year or less) offset short-term gains first; long-term losses (held more than one year) offset long-term gains. Net capital losses can offset up to $3,000 of ordinary income per year, with excess losses carried forward to future tax years. Reporting requires completing Form 8949 for each transaction and summarizing on Schedule D. Cost basis tracking is critical—taxpayers can use FIFO, LIFO, HIFO, or specific identification methods; HIFO tends to minimize taxable gains by assigning the highest-cost lots first. Tools like CoinTracker.io help aggregate transactions across exchanges and wallets into tax-ready reports. Aurora Training Advantage's accounting webinar with crypto tax expert Shehan Chandrasekera provides detailed guidance on calculating, tracking, and reporting cryptocurrency capital losses accurately.
Theft losses from cryptocurrency—including hacks, exchange fraud, and rug pulls—may be deductible, but the rules are complex and significantly more restrictive post-TCJA. For tax years 2018 through 2025 under the Tax Cuts and Jobs Act, personal casualty and theft losses are only deductible if they arise from a federally declared disaster. For crypto losses not meeting this criterion, the theft loss deduction is generally unavailable for personal investment assets unless the loss qualifies as a Ponzi scheme loss. IRS Rev. Proc. 2009-20 provides a safe harbor for Ponzi scheme losses, allowing deduction of a percentage of the investment loss as a theft loss if certain criteria are met—the perpetrator was charged or indicted, and the loss arose from a fraudulent arrangement. For transactions entered into for profit, a theft loss may still be deductible if the transaction was a profit-motivated activity rather than a personal one. Aurora Training Advantage's cryptocurrency taxation webinar covers each loss category with specific examples and Form 4684 reporting guidance.
An abandonment loss occurs when a taxpayer permanently discards or gives up property with no expectation of recovery, without a sale, exchange, or identifiable theft event. In cryptocurrency, abandonment losses may apply to coins that have become completely worthless—such as tokens from collapsed projects like Terra Luna—where there is no market, no prospect of recovery, and the taxpayer permanently relinquishes ownership. The loss is deducted in the year abandonment actually occurs. For abandonment to qualify, the taxpayer must demonstrate clear intent and a definitive act of abandonment—not merely a decline in value or temporary inaccessibility. The loss is treated as an ordinary loss for property used in a trade or business or an investment loss for investment property, reported on Form 4797 in some cases. Distinguishing a valid abandonment from a worthless security (which requires a formal identifiable event) or a capital loss sale is important for accurate treatment. Aurora Training Advantage's webinar on crypto loss taxation provides detailed scenarios illustrating good and bad examples of abandonment loss deductions.
A worthless security deduction under IRC Section 165(g) allows taxpayers to claim a capital loss on securities that become completely worthless during the taxable year. For the deduction to apply, the asset must qualify as a 'security' under the tax code—a term that includes stocks, bonds, and certain other instruments. Most cryptocurrencies and tokens are not classified as securities under the IRC, which limits the availability of the worthless security deduction for many crypto assets. For tokens that do qualify as securities, taxpayers can claim the loss as a capital loss treated as occurring on the last day of the tax year, which determines short-term versus long-term treatment. Tokens that do not qualify as securities may instead be subject to the abandonment loss rules or capital loss rules if sold or exchanged. The analysis requires careful examination of each token's legal classification. Tax professionals advising crypto investors must navigate these distinctions carefully. Aurora Training Advantage's accounting webinar on cryptocurrency loss taxation provides the framework to analyze each situation and apply the correct deduction category.
Accurate tax reporting for cryptocurrency requires disciplined transaction tracking from the start. The IRS requires taxpayers to track cost basis—the purchase price plus fees—for every crypto asset. When assets are sold, traded, or used, the basis of the lot disposed must be identified and matched against proceeds. Best practices include using a dedicated crypto tax platform such as CoinTracker.io, Koinly, or TaxBit that integrates with exchanges and wallets, automatically imports transaction history, and calculates gains, losses, and income by tax lot method. Maintaining records of every transaction—date, amount, value in USD at time of transaction, and counterparty or exchange—creates an audit-ready documentation trail. Choosing and consistently applying a cost basis method (FIFO, HIFO, specific identification) maximizes flexibility and tax efficiency. Non-fungible tokens (NFTs), DeFi transactions, staking rewards, and airdrops each have distinct reporting implications requiring specific attention. Tax professionals should request clients' complete transaction history early in the engagement. Aurora Training Advantage's cryptocurrency taxation webinar equips accounting professionals with practical tools and knowledge to serve crypto-active clients with confidence.