Phishing is one of the most common ways crypto investors lose their funds. A scammer poses as a trusted platform—like your exchange, wallet provider, or bank—and convinces you to click a malicious link or share sensitive login information. Once they have access, they move quickly, draining your account and disappearing without a trace.
This raises a key question: If someone steals crypto from your account, can you deduct the loss on your taxes?
The IRS addressed this type of scam directly in a 2025 legal memo. While the answer depends on several factors, the memo provides important guidance for crypto investors trying to recover financially after a theft.
What Is a Crypto Phishing Scam?
In a crypto phishing scam, a fraudster tricks you into giving up sensitive information—often by impersonating your exchange, wallet provider, or bank. They may send an email or text message with an urgent warning, asking you to “verify” your account or reset your password. Once they have access, they drain your funds and disappear.
Variations of this include:
- Fake login pages designed to steal your credentials
- Malware that captures keystrokes
- Impersonators posing as customer support
- Phone scams with spoofed caller IDs from real companies
In these cases, you’re not authorizing a transfer—you’re being deceived into giving access.
Can You Deduct Phishing Losses on Your Taxes?
According to the IRS, you typically can deduct crypto lost to phishing or hacking on your taxes—as long as the crypto was held for investment purposes and certain conditions are met.
What the Tax Code Requires
Under IRC § 165, taxpayers may deduct theft losses if:
- The loss resulted from a criminal act, such as fraud or larceny
- The crypto was held in a transaction entered into for profit
- There’s no reasonable prospect of recovery by year-end
- The loss is properly documented and reported
The IRS specifically affirmed that theft by phishing qualifies under this framework when the victim’s crypto was held as an investment.
IRS Memo Example
A 2025 IRS memo on theft and scam losses includes a case where a scammer sent a phishing email, gained access to a victim’s retirement and brokerage accounts, and stole the funds. The taxpayer did not authorize any distributions. The IRS concluded:
- This was a theft under state law
- The original investments had a clear profit motive
- The loss was deductible under IRC § 165
In the memo, the IRS made it clear that funds held in traditional investment accounts, like brokerage and retirement accounts, are automatically considered part of a profit-motivated transaction.
While there’s no official IRS ruling that applies this logic to crypto wallets or exchange accounts, the same principle likely holds true. If you were holding cryptocurrency with the intent to invest, trade, or earn returns, the IRS would probably view it as profit-motivated. Still, because crypto accounts don’t yet have the same regulatory treatment as traditional investment vehicles, it’s important to seek professional advice before claiming a theft loss.
How Much Stolen Crypto Can You Deduct on Your Taxes?
If you qualify for a theft loss deduction, you can only claim your cost basis in the digital assets. You cannot claim any unrealized gains.
Timing Matters
Under the tax code, a theft loss is deductible in the year it’s discovered, but only if there’s no reasonable prospect of recovery at that time.
If law enforcement or your exchange suggests there’s still a chance of getting the funds back, you may need to wait. But if you’ve been told that recovery is unlikely, you can typically claim the loss in that same tax year.
What You Should Do After a Crypto Phishing Attack
If you’ve been the victim of a phishing scam that resulted in stolen crypto, it’s essential to:
- File a police report and report the crime to IC3.gov
- Contact your exchange or wallet provider to document their response
- Gather transaction records and account history
- Consult with a tax professional before claiming the deduction
it’s important to obtain a legal opinion letter to support your theft loss deduction—especially if the loss is substantial. An opinion letter can help establish that the transaction meets the requirements under IRC § 165 and reduce your risk in the event of an audit.
Crypto Tax Reporting After a Phishing Scam
If you’re unsure how to handle stolen crypto on your tax return, we can help you:
- Determine whether a theft loss deduction applies
- Understand the requirements under IRC § 165
- Accurately report your transactions and cost basis
- Prepare supporting documentation for audit protection
Cryptocurrency phishing scams can be devastating, but in the right circumstances, you can at least save substantially on your taxes. At Gordon Law, we’ve helped crypto investors like you navigate IRS regulations since 2014, and we’ve helped several clients deduct stolen crypto on their tax returns.
Schedule a confidential consultation with our crypto tax lawyers to get clarity on how to move forward.
