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On January 13, 2023, the Internal Revenue Service (IRS) issued a General Counsel Advisory Memorandum (CCA 202302011) concluding that taxpayers may not claim a deduction for cryptocurrency losses that have no sale or other taxable provisions if such value is substantially has decreased. cryptocurrency continues to trade on at least one cryptocurrency exchange and has a value greater than zero.

Additionally, for individual taxpayers who purchased cryptocurrency for personal investment purposes, even if they could claim a deduction for cryptocurrency losses due to worthlessness or abandonment, the memo concludes that such deductions are generally disallowed due to various deduction limitations for tax years20. until 2025

In this article, we look at the main considerations that taxpayers should keep in mind if they want to claim deductions for cryptocurrency losses.



Generally, any loss incurred during a taxable year in connection with a trade or business or transaction for profit is deductible under Section 165 of the Internal Revenue Code (Code) unless it is covered by insurance or otherwise. A loss is deemed to be incurred during the tax year in which the loss occurs if it is evidenced by closed and completed transactions marked by identifiable events and, with certain limited exceptions, was actually sustained during the tax year. A loss is not incurred to the extent that there is a claim for recovery if there is a reasonable prospect of recovery until the tax year in which it can be reasonably ascertained that the claimed recovery will not be obtained. No deduction is allowed if the loss is due solely to a decrease in the value of property owned by the taxpayer due to market fluctuations or other similar causes. However, a loss from theft is allowed and taken into account in the tax year in which the taxpayer discovers the loss (provided no refund is claimed). Theft includes embezzlement, robbery, and theft, among other things.

If any “security” that is a capital asset declines in value during the tax year, the resulting loss is treated as a loss on the sale or exchange of the capital asset on the last day of the tax year. For this purpose, security means a share of stock in a corporation; the right to subscribe for or receive shares of the corporation; or a bond, bond, note, certificate or other evidence of indebtedness issued in registered form by a corporation, government or political subdivision of government.

Losses arising from a trade or business or a transaction for profit arising from a sudden cessation of usefulness in the trade or business or from the disposal of any non-depreciable property may also give rise to a deduction if such business or transaction has ceased or when such property has been permanently disposed of is from using there. To prove permanent abandonment, the taxpayer must show proof of intent to abandon the property and a deed confirming abandonment.

For individual investors who purchased cryptocurrency for personal investment purposes, losses from worthlessness or abandonment are classified as miscellaneous itemized deductions. However, under current law, losses characterized as miscellaneous itemized deductions are disallowed for tax years beginning after December 31, 2017 and before January 1, 2026. Accordingly, even if the taxpayer can set off losses due to worthlessness or abandonment before 2026, the deduction will be available. to be forbidden. In contrast, casualty, theft and betting losses are not classified as miscellaneous deductions and will not be allowed.



The memorandum considers a fact that the taxpayer bought cryptocurrency in 2022 for personal investment purposes. After the taxpayer acquired the cryptocurrency, its value declined significantly to the point where it was worth less than one cent at the end of 2022, although the cryptocurrency continued to be traded on at least one cryptocurrency exchange. The taxpayer retained possession and control of the cryptocurrency, including the ability to sell, exchange or transfer it. The taxpayer claimed a deduction on their 2022 tax return and took the position that the cryptocurrency was either worthless or abandoned.

A worthless cryptocurrency

The IRS stated that although the cryptocurrency had significantly decreased in value, there was no deductible loss because its value was greater than zero, it continued to be traded on at least one cryptocurrency exchange, and the taxpayer did not sell, exchange or otherwise dispose of it. . cryptocurrency. The IRS relied on existing case law which states that “a mere diminution in the value of property does not create a deductible loss. The economic loss of property value shall be determined by the permanent closing of the property transaction. The diminution in value must be accompanied by some positive step which will fix the extent of the loss, such as abandonment, sale or exchange.’ Additional case law states that there must be a recognizable event that establishes the fact that there is no current liquidation value and no future realizable value. Because the cryptocurrency still had liquidation value (even if it was valued at less than one cent), and because it was possible that the value would increase in the future, given that it was trading on at least one cryptocurrency exchange with the cryptocurrency in question. Was not totally worthless during 2022 as a result of a diminution in value, and the taxpayer did not suffer a bona fide loss due to the worthlessness under Code section 165(a).

Abandoned cryptocurrency

Under Section 165 of the Code, to claim damages for abandoned property, (1) the loss must arise in a trade or business or a transaction entered into for profit, (2) the loss must arise from a sudden cessation of usefulness in the trade. , business or transaction and (3) the property must be permanently removed from use or discontinued transaction. The IRS determined that the taxpayer did not abandon the cryptocurrency in 2022 for purposes of Code section 165(a) because the taxpayer did not take any steps to abandon and permanently abandon the cryptocurrency. Nor did the taxpayer demonstrate an intention to abandon the property, nor did he demonstrate any affirmative act of abandonment.

Instead, the taxpayer retained ownership of the cryptocurrency until the end of 2022 and retained the ability to sell, exchange or otherwise dispose of the cryptocurrency. Furthermore, the taxpayer continued to exercise dominion and control over the cryptocurrency and, regardless of intent, did not take any affirmative steps to exit the property during 2022.


This guidance takes the form of a General Counsel Advisory Memorandum, which is typically issued to IRS attorneys and revenue agents. The memorandum has no precedential value and cannot be relied upon (or cited as precedent) by taxpayers. However, many taxpayers consider such guidance because it is helpful in understanding the IRS’s current position on a particular issue, especially when no other guidance is available. The IRS may take a different position on the same or a similar matter, and such position will not require withdrawal of the memorandum.


Because miscellaneous itemized deductions may become available again in the future, taxpayers may still want to know how to claim these deductions. The memorandum provides that in order for a taxpayer to deduct a loss on its tax return under section 165 of the Code, the taxpayer must provide evidence of one (1) identifying event that establishes the fact that there is no current liquidation value. the applicable cryptocurrency or any possibility of future appreciation, or (2) an intention to abandon the cryptocurrency coupled with an affirmative act of abandonment.

Over the past 12 months, numerous cryptocurrency protocols have been subject to exploits and hacks, costing taxpayers more than $2 billion in theft losses (day, Ronin Bridge Hacking and Wormhole Bridge Exploitation). During the same period, several cryptocurrency exchanges filed for Chapter 11 bankruptcy protection in the United States. With respect to theft losses, provided that such taxpayers can show evidence of the theft and the amount of the loss and are not entitled to any compensation through insurance or otherwise, such taxpayers may deduct such losses from their tax returns. However, when it comes to cryptocurrency exchanges currently going through Chapter 11 bankruptcy proceedings, the answer is less clear given the uncertainty as to whether such taxpayers are entitled to a refund (dayas a creditor).

The most common way to give up cryptocurrency is to send it to a null address (also known as a burned address), which takes the cryptocurrency out of circulation so it cannot be used by anyone in the future. Such action should be considered as conclusive evidence of loss of possession and control over the cryptocurrency. Other opt-out methods may involve transferring the taxpayer’s right (or claim) to receive any currency to another party.


While the memo is helpful in providing insight into how the IRS is considering cryptocurrency-related guidance given the limited facts, questions remain about whether a taxpayer can claim a loss deduction for cryptocurrency losses. For example, the memorandum does not provide any discussion of the tax consequences of a taxpayer not having the ability to divest (or take other action) of cryptocurrency because it is frozen in a cryptocurrency exchange (eg, in the case of a cryptocurrency exchange undergoing Chapter 11 bankruptcy proceedings, which suspended withdrawals and/or other operations).

Although existing guidance provides that Bitcoin and Ethereum are likely to be treated as commodities because futures of these cryptocurrencies are traded on a commodity exchange, on March 28, 2022, the US Department of the Treasury (Treasury) released its fiscal year 2023 earnings proposals. and the Green Book, which expanded the definition of securities to include actively traded digital assets recorded on cryptographically secured distributed ledgers in other areas of the Code (such as securities lending under Code Section 1058). Given recent events in the cryptocurrency industry as a whole, the Treasury may consider expanding the definition of a security in section 165 of the Code, but no mention has been made.

The IRS has recently issued several memos on cryptocurrency-related topics, and IRS representatives have indicated that further guidance is forthcoming.

Anthony Teng, a lawyer in the New York office, also contributed to this article.


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