If you lost crypto to a scam, the deduction turns on documentation.
For years, personal theft losses weren’t deductible at all. That changed for one specific and important case — the profit-motivated investment scam. But the claim only survives if you can prove what happened.
Building that proof is the whole of what we do. It is not the same thing as getting your money back, and we will never pretend otherwise.
This page is not tax advice. Every situation is different, and whether you qualify — and how to file — is a determination for your CPA or tax attorney. We are forensic investigators, not tax practitioners.
What we produce is the one thing the deduction cannot survive without: the documentation.
What changed
The short version, with the citations so your professional can check us.
The 2017 Tax Cuts and Jobs Act amended §165(h)(5) to disallow most personal casualty and theft losses unless they came from a federally declared disaster. For ordinary theft, there was simply nothing to claim — and that limitation was made permanent by 2025 legislation, so it is not a window that reopens.
On January 17, 2025 the IRS Office of Chief Counsel issued Chief Counsel Advice 202511015 — “Allowance of Theft Losses for Victims of Scams Under I.R.C. Section 165.” It walks through five scam victims and concludes that three of them could deduct their losses and two could not.
The line between them was profit motive. The three who could deduct had been moving investment funds — to a new account, to a new opportunity, to somewhere they were told was safer. That is “a transaction entered into for profit” under IRC §165(c)(2), which survives the §165(h)(5) limitation. The two who could not were a romance scam and a kidnapping scam — real thefts, real losses, no profit motive, and therefore a disallowed personal casualty loss.
In plain terms: if you sent crypto to something you believed was a genuine investment, trading platform, or a safer place for money you already held, there may be a door here that ordinary theft does not have. Because the §165(h)(5) limitation is now permanent rather than expiring, this is the standing route — not a deadline to race.
One honest caveat about that document. A Chief Counsel Advice is not precedent and cannot be cited as authority. This one says so about itself: it responds to a request for “non-taxpayer specific advice,” and warns that “the actual scam may vary, and the application of this advice is dependent on the taxpayer’s specific facts.” It tells you how the IRS is thinking. It does not tell you how your case comes out — your CPA or tax attorney does that.
The catch: documentation is everything
The IRS position is not subtle here. Without proof, the deduction is denied. A story about what happened to you is not evidence of what happened to your money.
What generally has to be established
Your professional will scope this precisely. Broadly, a theft-loss claim needs all four.
That a theft occurred — under your state’s law
Not a market loss. Not a bad trade. Not a mistake you regret. A theft, which is a different legal category and needs different evidence. The good news is that it is defined broadly: “any criminal appropriation of another’s property… including theft by swindling, false pretenses and any other form of guile.”
That you entered it with a profit motive
This is the hinge of §165(c)(2), and it is why an investment scam is treated differently from a romance or gift scam. What you believed you were buying matters.
The amount, and the right year
The year is the one in which you discovered the theft and determined there was no reasonable prospect of recovery — both, not either. You don’t have to prove recovery is impossible; the standard is a reasonable prospect, and you are not required to be an “incorrigible optimist.” A law-enforcement response saying the funds are gone matters here.
A documented record
An IC3/FBI complaint, a police report where applicable, transaction IDs, exchange records — and the on-chain trail showing where the funds actually went.
If you haven’t filed with the FBI yet, do that first — it’s free, it takes minutes, and it belongs in the file regardless of what you decide about a deduction. The first-hour steps are here →
The number that surprises people — and it is not the one on the dashboard
If a fake platform showed your $20,000 “growing” to $400,000 before it vanished, the loss is not $400,000. Under §165(b) the deductible amount is your basis — broadly, what you actually put in — not the fair market value the screen was displaying, and not gains that were never real and never taxed.
The Chief Counsel Advice is blunt about it: the allowable amount is “the victims’ basis in the stolen funds,” and a taxpayer “generally may not take a loss deduction for income, or the unrealized gain from an investment, that has not been included in gross income.”
It also changes what the documentation has to prove. Establishing basis means reconstructing what you actually paid and when — purchase records, transfers in, the cost side rather than the dream side. That is a chain-of-custody problem, and it is exactly the part victims cannot assemble alone.
And the shortcut probably isn’t available to you
There is a well-known optional “Ponzi safe harbor” (Rev. Proc. 2009-20) that lets some victims claim a theft loss on simplified terms. It has a hard requirement: a lead figure who has been indicted or criminally charged.
In the scam scenarios the IRS analysed, the safe harbor did not apply — the scammer’s true identity was unknown, so there was no lead figure to charge. That is the ordinary situation in a crypto scam.
Which raises the documentation bar rather than lowering it. Without the safe harbor, the claim stands on the ordinary §165 requirements and the evidence behind them — that a theft occurred under applicable state law, that there was a profit motive, the amount, the year, and no reasonable prospect of recovery. Every one of those is an evidentiary question, and every one of them is answerable from records and public chain data if someone builds the trail.
The opinion letter, and what sits underneath it
For a significant loss, tax counsel will often prepare a legal opinion letter — the primary defense if the IRS ever questions the claim.
That letter is only as strong as the evidence beneath it. An opinion resting on a spreadsheet and a recollection is a very different document from one resting on a reproducible chain of custody anchored to block hashes. The second one can be re-run by anyone, including an examiner.
What we produce — and what we don’t
We reconstruct where your money actually went, hop by hop, from permanent on-chain data and public record — and preserve it as a reproducible chain of custody. Block hashes and all.
- ×We are not a recovery service. Traced is not recovered. Most traced funds are already gone, and anyone who tells you otherwise is lying to you.
- ×We do not give tax advice or determine eligibility. That is your CPA’s or your attorney’s judgment, and we will not pretend to make it for them.
- ✓Reproducible, not “trust us.” The methodology is transparent and independently re-runnable. You, your professional, or the IRS can follow the same steps and reach the same answer. That property is the entire point — a finding nobody else can reproduce is an opinion wearing a lab coat.
- ✓Every finding is graded. We separate what is proven from what is a lead from what is unresolvable without legal process. A file that marks its own uncertainty is worth more under scrutiny than one that doesn’t, because the examiner will find the soft spots either way — better they’re labelled by us.
- ✓No upfront fee, ever. It starts with a free consultation. We look at your situation and tell you honestly whether documentation would help you. If it wouldn’t, we say so and point you to free resources.
Even if the money is gone
Sometimes the honest answer is that the funds cannot be recovered. That is usually the answer.
A documented loss is still worth having. It is what a deduction claim is built on, what supports any future restitution or class action, and what turns a wound with no paper around it into a clear, permanent record.
You cannot un-send a blockchain transaction. You can refuse to let it stay undocumented.
Want to see what one of these looks like before you talk to anyone? Read a documented case → · See a sample report →
Are you a CPA or a tax attorney?
If your client has a crypto theft loss, we produce the reproducible, methodology-transparent chain-of-custody documentation the §165(c)(2) claim and the opinion letter stand on. We document; you decide and file.