How it works
In a rug pull, a project’s developers abandon it and withdraw investor funds, leaving holders with a worthless token. If the token was sold or abandoned, a capital loss may be available, subject to the capital loss limits. If the facts show fraud from the start, a theft loss under Section 165(c)(2) may apply, which is deductible in full against ordinary income. Documentation of the fraud and of the year of discovery decides the characterization.
Why it matters
The difference between a capped capital loss and an uncapped theft loss can be large, and a written opinion supports the position.
Related: crypto theft loss, worthless crypto. Read more: rug pulls and tax losses.
