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Last reviewed: May 30, 2026 · NJ CPA License #20CC04711400
Cryptocurrency lost to an investment scam, a fraudulent platform, or a hack can often be deducted as a theft loss under IRC §165(c)(2) - when the loss came from a transaction entered into for profit, the act is theft under applicable law, and there is no reasonable prospect of recovery. Most personal casualty/theft losses are not deductible; that limitation was made permanent in 2025.
The One Big Beautiful Bill Act (P.L. 119-21, §70109, 2025) made the TCJA limitation permanent: personal casualty and theft losses are deductible only when attributable to a federally declared disaster - and, beginning in 2026, state-declared disasters. There is no 2025 sunset. The §165(c)(2) for-profit theft-loss carve-out is unaffected and is now the only path for most scam victims.
In CCA 202511015 (released March 14, 2025), the IRS concluded that victims of profit-motivated investment scams can claim a §165 theft loss, while purely personal scams cannot. A Chief Counsel Advice is non-precedential and may not be cited as precedent under IRC §6110(k)(3), but it states the IRS’s current analysis.
Fraud, larceny, embezzlement, or similar. A mere decline in value, a bad trade, or losing your own keys is not theft.
Held as an investment / for-profit, not personal use. This is the line CCA 202511015 draws.
The loss is reduced by reimbursement or recovery you reasonably expect - platform, bankruptcy estate, insurance, or clawback (IRC §165(e); Reg. §1.165-1(d)).
Generally the year of discovery, measured by adjusted basis reduced by expected recovery - not the coin's peak value. When property is fully stolen its post-theft fair market value is typically $0, so the loss is effectively basis-less-recovery.
The IRS analyzed five scam scenarios. The dividing line is profit motive.
| Scam scenario | Profit-motivated? | §165(c)(2) theft loss? |
|---|---|---|
| Compromised-account scam (told funds at risk, move them, they are stolen) | Yes | Deductible |
| "Pig-butchering" investment scam (fake platform, fake gains) | Yes | Deductible |
| Phishing / impersonation investment scam | Yes | Deductible |
| Romance scam (no investment purpose) | No | Not deductible |
| Fake-kidnapping / extortion scam | No | Not deductible |
The IRS also held the Rev. Proc. 2009-20 safe harbor did notapply to these five scenarios - they were not Ponzi-type “specified fraudulent arrangements.”
Amounts a scammer induced you to pay as bogus withdrawal taxes, fees, or penalties are part of the deductible theft loss.
If you were deceived into taking a retirement distribution to fund the scam, that distribution remains taxable income (and may carry early-withdrawal penalties) even though the theft loss is separately deductible - they do not automatically net.
Because a loss is reduced by expected recovery (IRC §165(e); Reg. §1.165-1(d)), each estate’s current status controls.
These figures move with every distribution and vary by creditor class and claim type. Confirm the current numbers for your specific claim against the primary estate notices - the FTX Recovery Trust notices (Kroll) and the Celsius distribution portal (Stretto) - before relying on anything below. The table is an illustrative snapshot as of May 2026, not a determination for any individual claimant.
| Estate / class | Cumulative recovery (illustrative, ~May 2026) | Typical deduction implication |
|---|---|---|
| FTX Dotcom customers (Class 5A) | ~96% | Little/no loss; timing & gain issue |
| FTX U.S. customers (5B), Classes 6A/6B | ~100% | Generally no deductible loss |
| FTX Convenience class (Class 7) | ~120% cumulative | No loss; potential gain on distribution |
| Celsius Earn accounts | Partial & contested; staggered Earn distributions began Apr 15, 2026 - confirm your class via the Stretto portal | Loss only to the extent it exceeds expected recovery |
| Celsius Custody holders | ~100% (own their crypto; distributions began Feb 1, 2026) | Generally no deductible loss |
For most FTX creditors there is no deductible theft loss - recovery meets or exceeds the November 2022 petition-date claim; the real questions are timing and the gain/loss on distributions valued at those 2022 prices. For Celsius Earn holders, a shortfall remains only to the extent the loss exceeds the (substantial, rising) expected recovery. Claiming an exchange-collapse loss before recovery is known - or at all where recovery approaches or exceeds 100% - is a common, audit-prone error.
For a “specified fraudulent arrangement” whose lead figure was charged, a qualified investor may deduct 95% of the qualified investment (not pursuing third-party recovery) or 75% (pursuing), less actual or potential insurance or SIPC recovery. The discovery year is when the indictment/complaint is filed; it is claimed on Form 4684, Section C; and the 95% election requires a penalties-of-perjury statement (Rev. Proc. 2009-20). It does not fit every crypto loss and did not apply to the five scam patterns above.
New Jersey’s Gross Income Tax is a category-based system that does not track the federal itemized-deduction regime, so a federal Schedule A theft-loss deduction typically does not flow to the NJ-1040 the same way, and NJ generally handles crypto gains/losses under its own income categories (with its own netting limits). For NJ residents the federal and state answers can differ - we confirm treatment against current NJ Division of Taxation guidance for your facts.
Run the free Crypto Theft-Loss Eligibility Checker, then book a feasibility review.
Often yes. Crypto sent to a fraudulent investment scheme with a profit motive is generally a theft loss in a transaction entered into for profit under IRC §165(c)(2). The IRS confirmed this for investment-scam victims in Chief Counsel Advice 202511015 (released March 14, 2025). Purely personal scams such as romance or fake-kidnapping schemes do not qualify.
For most FTX creditors, no longer. The FTX Recovery Trust is paying roughly 96% to 100% of petition-date claim values (convenience-class claims around 120%), so there is generally no net loss; the live issues are timing and the gain or loss on the distribution. Celsius Earn holders are receiving partial, staggered recovery (Earn distributions began April 15, 2026; the exact percentage is contested and varies by class and source), so any deductible shortfall is only the amount the loss exceeds that expected recovery. It is fact-specific, and the figures move with every distribution - confirm your specific claim against the primary estate notices (FTX Recovery Trust via Kroll; Celsius via the Stretto portal).
No. The personal casualty and theft-loss restriction was made permanent in 2025 by the One Big Beautiful Bill Act (P.L. 119-21, §70109), but that applies to personal losses. The §165(c)(2) for-profit theft-loss deduction for investment scams is unaffected and remains available.
Your adjusted cost basis (generally what you paid), reduced by any expected recovery - not the coin's all-time-high value.
Generally the year of discovery, reduced or deferred by any reasonable prospect of recovery. Under the Rev. Proc. 2009-20 safe harbor specifically, the discovery year is the year the lead figure is charged.
Generally yes. The retirement distribution remains taxable income (and may carry early-withdrawal penalties) even though the theft loss is separately deductible - they do not automatically offset. This should be modeled before filing.
Generally no. CCA 202511015 treats purely personal scams as nondeductible; only profit-motivated investment scams qualify under §165(c)(2).
Ownership and transfer proof (wallet addresses, on-chain transaction hashes, exchange records), evidence of the scam or theft, a police and/or IC3 (FBI) report, any bankruptcy-claim, insurance, or clawback records bearing on recovery, and a written analysis of the discovery year and the absence of a reasonable prospect of recovery.
Tax advice disclaimer: This material is for general educational information only and is not legal, tax, or accounting advice for your specific facts. A CPA-client relationship is formed only through a signed engagement letter.