How it works
Section 165 allows a deduction for losses not compensated by insurance. Since 2018, personal theft losses are deductible only in federally declared disasters. Losses on transactions entered into for profit fall under Section 165(c)(2) and remain deductible in full against ordinary income, not subject to the capital loss limits. IRS Chief Counsel Advice 202511015 (March 2025) applied this to crypto scams: investment-style frauds qualified, while romance and ransom losses did not.
Why it matters
Deductibility turns on why you transferred the crypto and how well you can prove the theft, the year you discovered it, and that no recovery is reasonably expected. The deduction is claimed in the year of discovery.
Example
You transferred 80,000 dollars to what appeared to be a trading platform and were locked out when you tried to withdraw. With documentation of the platform, the messages, the transaction hashes, and a police report, the loss may be deductible under Section 165(c)(2) in the year you discovered the fraud.
Related: pig butchering scam, Section 165, rug pull. Read more: crypto theft loss opinion letters.
