By Alan Shevins, CPA

If you’re investing in cryptocurrency, be prepared for a possible sting on your tax return if your coins are stolen.  Prior to 2018, you had the option to deduct stolen coins as a Casualty & Theft loss if the loss exceeded 10% of Adjusted Gross Income (AGI). A second option for a loss deduction that Congress enacted in response to the Madoff Ponzi affair was made available to victims of ponzi schemes. In short, taxpayers who suffered losses in a ponzi type fraud could deduct their losses with no AGI limits.

One qualification for this favorable rule was that the perpetrator of the fraud be charged under U.S. Laws with fraud or a similar crime, or that the lead figure be the subject of a state or federal criminal complaint alleging the commission of a crime of like nature. The victim is eligible to take this Ponzi scheme deduction in the taxable year in which the indictment or complaint was filed against an alleged perpetrator. The deduction was the amount actually invested plus any net profits previously included in income.

Beginning in 2018, the casualty loss and Ponzi scheme loss deduction rules disappear under the new tax law enacted by Congress at the end of 2017.  It is already bad enough for those who invest in cryptocurrencies to have their coins disappear without a trace of who emptied their wallet/account. Now there is no tax relief for those who suffer these types of losses (or hacked theft losses).  And new disappearances are occurring with some frequency.

INVESTORS BEWARE! Consider the multiple risks before investing in cryptocurrencies.  It appears that you will not receive any sympathy from the government, based on the new tax laws related to non-trading losses.