Crypto scams are everywhere—from pig butchering investment schemes to impersonators stealing funds directly from your wallet. If you’ve been a victim, your losses may feel devastating. But can you deduct them on your taxes?
The IRS recently released a Chief Counsel Advice Memorandum offering guidance on when crypto scam losses may qualify as theft losses under IRC § 165. While not a binding revenue ruling, this memo reveals how the IRS is likely to interpret the law, and it provides critical insight for anyone trying to recover financially after a scam.
Let’s break down what qualifies, what doesn’t, and how specific scam types are likely to be treated.
What the IRS Memo Says About Deducting Crypto Scam Losses
The memo analyzes multiple real-world scenarios, including pig butchering scams and account impersonation frauds, to determine whether victims can deduct their losses. Here’s what it makes clear:
- Theft Under State Law
The loss must result from a criminal act such as fraud, larceny, or embezzlement. - Profit Motive
The crypto must have been held as an investment property. If transferred, you must have done so with the primary intention of making a profit. Transactions driven by personal reasons—like helping a loved one—do not qualify. - No Reasonable Prospect of Recovery
By the end of the tax year, it must be clear you won’t get the money back. This usually means that after you’ve contacted law enforcement, the scammer is unidentified and the funds are unrecoverable. - Unrealized Gains Are Not Deductible
The deduction is limited to your cost basis in the property, not unrealized gains or promised returns. - You Must Take Reasonable Steps, Including Reporting the Theft
The IRS expects victims to take reasonable action after discovering the theft—including reporting it to law enforcement or relevant authorities. While there’s no explicit statutory requirement to file a police report, the memo’s examples assume victims did so and were informed there was little to no prospect of recovery. Failure to report the scam could undermine your claim.
When Can You Deduct the Loss from a Crypto Scam?
Under IRC § 165(e), a theft loss is deductible in the year the loss is discovered, but only if there’s no reasonable prospect of recovery at that time.
The IRS memo emphasizes:
- You don’t need to wait for a criminal conviction or civil lawsuit to conclude
- You must wait until it’s clear the assets aren’t coming back—usually based on guidance from your financial institution, law enforcement, or other formal channels
- If there’s still a real chance of recovery (e.g., open investigation with potential leads), the deduction must wait
For example, if you discovered the scam in 2024 and, by year-end, confirmed there’s little or no hope of recovery, you’d deduct the loss on your 2024 tax return (filed in 2025).
Keep records showing when you reported the scam and what response you received. This may include statements from your bank, local police report, the FBI’s IC3 portal, or other authorities.
How Much Can You Deduct if Your Crypto was Stolen?
If you qualify for a theft loss under IRC § 165(e), you can only deduct your cost basis in the stolen digital assets. You cannot claim any unrealized gains.
What About the Ponzi Scheme Safe Harbor?
Some taxpayers try to claim theft losses under the Ponzi scheme safe harbor from Rev. Proc. 2009-20, which provides a simplified way to deduct certain fraud losses. However, the IRS memo makes it clear: Most crypto scams don’t qualify.
To use the Ponzi safe harbor, the following must be true:
- The scam must be a “specified fraudulent arrangement” (i.e., a Ponzi scheme—where new investors’ money is used to pay fake returns to earlier investors)
- The scam must have a “lead figure” who has been charged by indictment or criminal complaint at the state or federal level (not just suspected)
- The loss must be a “qualified loss” tied to that fraudulent arrangement
In the memo, even the pig butchering scam—despite its fraud and fake returns—does not qualify for the Ponzi safe harbor because:
- The scammer was never indicted or charged, and
- There was no flow of funds between investors (e.g., no payouts from one victim’s money to another)
If your scammer hasn’t been criminally charged, you likely can’t use the safe harbor. You’d need to claim the loss under standard §165 theft loss rules—requiring documentation, proof of theft under state law, and a profit motive.
When Should You Seek Legal Help?
Since the IRS has not released any official guidance, you may want to obtain a legal opinion letter from a tax attorney to support your tax deduction. We typically recommend an opinion letter for any scam loss of $100,000 or more.
An opinion letter is a written legal analysis, typically prepared by a tax attorney, that:
- Explains why your situation qualifies as a theft loss under IRC § 165
- Cites relevant tax law, court decisions, and IRS guidance
- Evaluates the profit motive, the nature of the scam, and your actions (e.g., reporting to law enforcement)
- Can serve as part of your defense file in the event of an audit
For large losses, having a formal legal opinion can demonstrate due diligence and significantly reduce your audit risk.
Need one? Gordon Law has helped several crypto scam victims with tax treatment and legal opinion letters. Get in touch to see if this makes sense for your situation.
Common Crypto Scams: Can You Claim a Tax Loss?
Below are some of the most common crypto-related scams, how they work, and how the IRS memo suggests they should be treated.
| Scam Type | Description | Deductible? | Why |
| Pig Butchering | Fake investment platform, victim believes they’re earning returns. Platform claims the victim must pay tax before withdrawing funds | ✅ Yes | Entered into for profit; theft; no recovery |
| Phishing/Account Takeover | Scammer gains access and drains accounts | ✅ Yes | Funds invested for profit; theft; no recovery |
| Fake Investment Sites | Victim sends funds to fraudulent trading platform | ✅ Yes | Profit motive; theft; no recovery |
| Romance Scams | Victim meets a scammer through a dating platform and sends funds to help them | ❌ No | Transaction not entered into for profit |
| Kidnapping/Ransom Scams | Victim sends money under duress to save a loved one | ❌ No | Transaction not entered into for profit |
| Giveaway Scams | Victim sends crypto to a scammer, expecting to double it, as part of a fake giveaway | ❌ Likely no | May be difficult to prove legitimate investment intent |
| Rug Pulls | Project disappears after launch | ⚠️ Depends | If clearly fraudulent: Theft;If the project simply failed: Capital loss |
Pig Butchering Crypto Scams
Pig butchering scams lure victims with a fake crypto investment platform, often through unsolicited messages on social media or dating apps. Victims are encouraged to make small deposits and even receive fake profits before being pressured to invest more.
However, when the victim tries to withdraw their funds, they cannot. The scammer may claim they need to pay taxes or some other fee in order to withdraw.
IRS View:
This is the scenario covered most directly in the IRS memo. A victim who transfers funds with the intent to earn profits qualifies for a deductible theft loss, assuming the scammer is unknown and recovery is unlikely.
Phishing, Hacking, and Account Takeover Scams
In a crypto phishing or hacking scam, a criminal tricks the victim into sharing login credentials or clicking malicious links. The scammer drains crypto or investment accounts without the victim’s authorization.
IRS View:
If your funds were invested for retirement or investment purposes, and you didn’t authorize the transfer, the IRS still considers this a theft loss incurred in a profit-motivated transaction, so the deduction is allowed.
Fake Crypto Investment Sites
Sometimes the scam isn’t as sophisticated as a full pig butchering campaign. It may just be a fake crypto investment site offering outrageous returns, designed to collect deposits and disappear.
IRS View:
If you transferred funds to a site you believed to be a legitimate investment platform, and your intent was to earn profit, the theft loss deduction may apply.
Romance Scams
Cryptocurrency romance scams involve building a fake emotional relationship with the victim. Eventually, the scammer asks for financial help (often for a medical emergency or travel expense) and disappears once the funds are sent.
IRS View:
These are considered personal losses, not profit-seeking transactions. Even though the transfer was induced by fraud, there’s no investment or income motive. Therefore, the deduction is not allowed.
Kidnapping and Extortion Scams
In these scams, a criminal pretends to have kidnapped a loved one or impersonates law enforcement claiming a relative has been arrested. The victim is told to transfer money quickly to ensure their safety.
IRS View:
Even though these scams involve criminal fraud, the funds were transferred for personal reasons, not profit. The IRS considers this a personal casualty loss, which is not deductible under current law (TCJA 2018–2025).
Giveaway Scams
In a crypto giveaway scam, someone impersonating a celebrity or brand promises to send you back double the amount of crypto you send them. These scams are often promoted through hacked Twitter accounts or YouTube videos.
IRS View:
Crypto giveaway scams are not directly addressed in the memo. However, it’s unclear whether sending funds to a one-way wallet with no platform, product, or follow-up can truly be considered a “transaction entered into for profit.”
While you believed you’d profit, the action may resemble a gamble or gift, not a bona fide investment. If you try to claim a theft loss for this type of scam, be prepared for scrutiny, and be sure to discuss it with a qualified tax professional.
Rug Pulls
In a cryptocurrency rug pull scam, developers hype up a project, collect crypto from buyers, then disappear with the funds (or drain the liquidity pool).
IRS View:
This is a gray area. If there’s evidence of intentional fraud, you may qualify for a theft loss. But if the project simply failed or the asset lost value, you’re looking at a capital loss, not a theft.
Preserve all marketing materials, Discord chats, transaction records, and project updates. These may help prove whether fraud occurred.
Need Help with a Crypto Scam Loss?
At Gordon Law, we help crypto investors navigate complex IRS rules, including theft loss claims. If you’re unsure whether your loss is deductible, we’re here to help.
Schedule a consultation today to get clarity on your crypto tax situation.
