Rug pulls have become a well-known risk in the crypto world, especially in DeFi and NFT ecosystems. In this type of scam, a developer hypes up a new project, collects investor funds, and then vanishes—leaving behind a worthless token and an empty Discord server.
If this has happened to you, you’re not alone. But are you allowed to deduct the loss on your taxes?
The IRS hasn’t issued specific guidance on rug pulls, but existing tax law does offer a framework for how crypto-related losses may be treated—either as theft losses or capital losses. In most cases, rug pulls are more appropriately handled as capital losses, though the right treatment depends on the circumstances and how well the facts can be documented.
What Is a Rug Pull in Crypto?
A rug pull occurs when crypto developers abruptly abandon a project after raising money from investors. This often involves:
- Creating a token with lofty promises of future value (typically dependent on further development, marketing, or community building)
- Launching on a decentralized exchange or minting platform
- Promoting fake features or partnerships
- Disappearing after launch or draining the project’s liquidity
Sometimes the token still exists but is functionally worthless. Other times, the entire ecosystem is wiped clean overnight.
Can You Deduct a Rug Pull Loss?
In most cases, rug pull victims can report their loss as a capital loss.
If you bought a token or NFT that became worthless, you may be able to report the asset as disposed of for $0. This allows you to claim a capital loss, which can be used to offset capital gains or deducted against ordinary income (subject to annual limits).
You must realize the loss by disposing of the asset or abandoning it. If a digital asset has become worthless but you’re still holding onto it, you cannot claim a loss.
What About a Theft Loss Deduction?
Rug pulls generally do not qualify for a theft loss deduction under Internal Revenue Code § 165.
To claim a theft loss, you must show that the loss:
- Resulted from a criminal act like fraud or larceny under state law
- Was connected to a transaction entered into for profit
- Is unrecoverable by the end of the tax year
- Has adequate documentation to support those facts
Unlike other scams, rug pulls rarely provide enough evidence to meet that threshold. The developers are often anonymous or offshore, and there is typically no investigation or law enforcement involvement. That makes it difficult to prove the project involved criminal theft rather than failure or mismanagement.
To be clear, you do not need the scammer to be arrested or indicted to claim a theft loss. But you do need to show that theft occurred and that it meets the requirements under the tax code. That’s a high bar for most rug pulls.
IRS Guidance on Rug Pull Scams
An IRS memo from 2023 provides guidance for reporting worthless cryptocurrency. It specifies that you must dispose of or abandon the worthless assets in order to claim a capital loss.
A more recent IRS memo on theft losses doesn’t mention rug pulls by name, but it does confirm that theft losses can apply in crypto-related scams—if the taxpayer can show that the loss involved a profit-motivated transaction, was caused by criminal theft, and is unrecoverable. Rug pulls typically don’t meet the requirements.
Need Help With Taxes After a Rug Pull?
At Gordon Law, we help clients navigate the tax implications of cryptocurrency scams, including rug pulls, phishing attacks, and pig butchering scams. We’ll walk you through your options, help you determine the best reporting method, and prepare legal documentation when needed.
Schedule your confidential assessment with a crypto tax attorney and find clarity on how to report your lost or stolen crypto.
