How it works
Section 165 allows a deduction for losses sustained during the year and not compensated by insurance. Subsection (c)(1) covers trade or business losses, (c)(2) losses in transactions entered into for profit, and (c)(3) personal casualty and theft losses, which since 2018 are limited to federally declared disasters. Theft losses are deducted in the year of discovery when no reasonable prospect of recovery exists.
Why it matters
The profit-motive requirement of (c)(2) is what separates a deductible crypto scam loss from a non-deductible personal one, and it is the section the 2025 Chief Counsel guidance applied.
Related: crypto theft loss, worthless crypto.
