This has been a busy crypto week with lots of discussion about possible changes to various tax laws (as well as a certain tax agency) that may unfold during the remainder of 2025.
Despite the uncertainty, it was great to see IRS Chief Counsel publish advice that provides guidance to individuals caught up in various financial scams and are trying to figure out if any tax relief is available.
The advice is not crypto specific, but a lot of these scams involve crypto as the medium of payment to the scammer, so it is definitely relevant.
As a preliminary matter, the advice reminds readers that every scam may be different so the availability of a tax deduction will always be governed by the specific facts in any given situation. The advice also makes it clear that the scams involved qualified as thefts for purposes of the tax code.
The advice describes 5 basic scenarios concluding that in 3 of them a theft loss deduction is allowed, while a deduction isn't allowed in the remaining 2.
Deductible scenarios:
? Compromised Account Scam
? Pig Butchering Investment Scam
? Phishing Scam
The common element that makes these losses deductible is the fact that the scam involved providing funds to the scammer for the purpose of making a profit on the funds (investment). This profit motive element makes the activity not personal in nature and, therefore, deductible.
Non-deductible scenarios:
? Romance Scam
? Kidnapping Scam
While both of these two scenarios are extremely terrible, the value of the funds or property lost is not tax deductible because the motivating factor for transferring funds to the scammer was personal rather than profit based.
Prior to 2018, these scenarios would have resulted in a tax deduction but under the Tax Cuts & Jobs Act (TCJA), in effect from 2018 through 2025, deductions for personal theft losses are not deductible.
TCJA is set to expire this year. Congress and the new Administration are looking right now at extending TCJA tax law changes for years after 2025. Given the rise and massive value involved in these currently non-deductible scams, it will be interesting to see whether this particular piece of the law gets changed to allow a deduction.
For the deductible scenarios, the advice also provides guidance on both the amount and timing of the loss:
?? Amount of loss is limited to the cost basis of the property lost (less any recovered value)
?? The loss is deductible in the year the theft is first discovered, but must be delayed until any reasonable prospect for recovery of the funds is resolved
Although not totally on point with respect to value lost in various crypto bankruptcies over the past few years, this advice does provide some legal insight into how the IRS is applying the law in this space.
Hopefully this advice is a precursor to some guidance about those bankruptcy situations.
https://lnkd.in/gWvjf7up
#IRS #CryptoTax
