Can I claim a capital loss from lost cryptocurrency due to a cryptocurrency investment scam?If so, how would I do this?

Forum|Forum|4 years ago
February 22, 2022
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Last year I lost about $4500 due to a cryptocurrency investment scam. I'm not sure how to properly record this as a loss on the forms. I should clarify, this was due to a Ponzi-Scheme type of loss (Shizupan/"Pig Butchering" scam).

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ZoltanB45

You were able to write off theft against business income but not as a capital loss in the past.

Even if your situation was a theft from your business, you would not be able to claim the losses today, unless the loss was attributable to a federally declared disaster.

This deduction has been suspended until at least 2026 under the Tax Cuts and Jobs Act (TCJA) that went into effect in 2018.

Opus 17

Employee

If you want to deduct this, you should consult a tax professional in your area.

The issue is, is this an investment loss or a theft loss. If it's an investment loss, you report the loss by "selling" the investment for zero dollars, and reporting whatever taxable basis you had (the money you originally invested). If it's a theft loss, it's not deductible due to the tax reform law which otherwise increased the standard deduction and lowered the tax rates to offset the lost deductions.

Generally, the difference between a theft and a loss is that in a theft, there must be a thief. There is a tax court case of a forged painting. When the taxpayer discovered the forgery, they wanted to take a theft loss for the lost value, because that deduction was better for them in their situation. But the facts were that the forgery was at least 80 years old, so neither the gallery owner who sold it or the previous owner who consigned it could be said to be a "thief". Since no thief could be identified, the court ruled it was an investment loss, and that they couldn't even deduct the investment loss until they realized the loss by selling the painting for less than they paid.

Turning that around, a cryptocurrency that fails due to bad coding or market forces might be a loss, but if there is a thief, then it's theft.

If you deduct it as an investment loss and are audited, you would have to prove it was not theft and there was no thief, and it was just a badly run business.

Opus 17

Employee

The other possibility is special rules relating to Ponzi schemes. The problem is, I can't find a definitive statement on whether or not Ponzi scheme losses are still allowable even though general theft losses are not. (This is complicated because investment losses are deductible, and theft of personal property is not deductible, but Ponzi schemes are in between.)

You may want to see a tax professional. Also, Ponzi losses are not supported by Turbotax, so you will have to figure it out yourself using the IRS revenue procedures.

https://www.irs.gov/newsroom/help-for-victims-of-ponzi-investment-schemes

The IRS provides two items of guidance to help taxpayers who are victims of losses from Ponzi-type investment schemes.

Revenue Ruling 2009-9 provides guidance on determining the amount and timing of losses from these schemes, which is difficult and dependent on the prospect of recovering the lost money (which may not become known for several years).
Revenue Procedure 2009-20 simplifies compliance for taxpayers by providing a safe-harbor means of determining the year in which the loss is deemed to occur and a simplified means of computing the amount of the loss.

LeoVTM

I fell into the "Pig Butchering" scam and lost all the money. I've read all posts here. I've been looking for the answer but nothing is clear. Wonder if anyone is being in the same with my situation has found out the solution or found the right tax professional that understands and helps you out, please Pls share/introduce to me. I'm looking for one in Massachusetts area but haven't found any yet.

Thank you!

GeorgeM777

Not sure about the nature of a "pig butchering" scam. If it was an investment, the most efficient way to claim a loss is if you were able to close the transaction such that you realized a loss. In other words, you were able to sell your investment which would allow you to realize a loss. To claim this was a worthless security is more complicated and we would need more information from you to better assess your tax situation. Moreover, even with additional information, our advice may be to seek assistance from a personal tax advisor.

A theft loss may be an option for you, although, there are requirements for proving theft and similar to a worthless security, whether you can claim a theft loss will turn on the evidence. A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent. The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.

Below is a link to an IRS webpage that addresses casualty, disaster, and theft losses which you might find helpful.

Casualty, Disaster and Theft Losses

@LeoVTM

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LeoVTM

Thanks for your response. You might have already known about "Pig Butchering Crypto Scam" and I add it here for anyone that hasn't known yet:

The latest crypto scam is being called “pig butchering” because it is a heavily scripted and contact intensive fraud meant to fatten the prey (or victim) before slaughter (or taking their money).

Emanating from Southeast Asia, the crypto investment scam typically starts with the fraudster making contact with the victim via social media, dating apps, or WhatsApp using a fake profile. They slowly build a relationship and rapport to earn the victim’s trust before casually mentioning they make significant amounts of money through cryptocurrency investments.

When the victim expresses interest in making an investment, the scammer will direct them to websites that appear to be legitimate cryptocurrency exchange platforms. In reality, the scammer exclusively controls the exchange.

The victim will usually go to a mainstream exchange like Coinbase, buy stable coins (like: 1 USDT = 1USD), and transfer a few small investments to the fake platform’s wallet. The scammer will then post modest gains and even allow the victim to withdraw small amounts of money once or twice as a way to build trust and prove the platform is legitimate.

Once convinced that the platform is legitimate and the gains are real, the victim will start making larger investments, sometimes in excess of hundreds of thousands of dollars. In many cases, victims get this money from personal loans, retirement assets, and home equity lines of credit.

When the victim eventually wants to withdraw the larger investments made, they are denied by the scammer. The fake platform will say the victim must pay a percentage (10-30%) of the requested amount in taxes before the withdrawal can be processed. This requirement is a lie. Even if the victim does pay the purported taxes, the scammer will continually deny the withdrawal of funds for one reason or another.

Eventually, the scammer vanishes, cuts off contact, and takes the victim’s invested money resulting in another successful pig butchering crypto scam.

So far I haven't got any clear info of how the victims could claim their losses on tax return. I've been reaching out to check with the a few local tax specialists but none of them have experienced with this situation. They mentioned the Ponzi scam but Ponzi is different; which the investors transfer money directly from their banks to the companies that probably can be traced by the U.S. via the bank transactions. On the contrary, the Pig Butchering scam is the investors transfer money from their banks to their legal crypto wallet (coinbase) and then purchase the USDT to transfer to the fake exchange platform (could be international). Soon the money transferred to the fake exchange platform via the private encrypted keys, it's gone without trace...

My case is probably the same as @jadoye ; wonder if Jadoye has found the solution yet?

amitc

I found this article helpful
https://news.bloombergtax.com/tax-insights-and-commentary/victims-of-crypto-and-nft-fraud-can-take-theft-loss-deductions

Prior to 2018, losses due to theft could be deducted as an itemized deduction, but the TCJA limited the theft loss deduction to losses attributable to a federally declared disaster until 2025.

There is a special exception for victims of Ponzi-type investment schemes. In 2009, the IRS published Revenue Ruling 2009-9 to provide tax relief to the victims of Bernie Madoff’s $64 billion Ponzi scheme. In this ruling, the IRS stated that if any money put into an investment account with the expectation of profit and is found to be fraudulent, any loss is considered a business theft loss and not a personal theft loss. Therefore, the personal theft loss limitation stated above does not apply.

@LeoVTM @CCnewlife988

Anonymous

I lost $50k in Bitcoin to an investment scam and being scammed further while seeking help. After months of struggle, i found [email address removed], who successfully recovered my lost funds.