Can the Tax Code help recover your crypto losses?

Situation 1:

Your crypto is underwater but you believe it may come back. Consider using the “wash sale” technique.  

• You can sell your crypto at the low value, immediately rebuy it and lock in a loss if you have a reason to do so.  

                Purchased: $50,000

                Value: $10,000

                Sell @ $10,000 = $40,000 capital loss

                Rebuy at $10,000

Situation 2:

You just want out! Crypto is a capital asset and thus your character will be a short or long term capital loss (or gain).  

• Capital losses offset other capital gains but are limited to $3,000 per year w/o other gains.

• You must have a REALIZED LOSS!  So yes, you actually have to sell it.

Situation 3:

Your crypto was lent out via a platform such as Celsius, FTX etc. Your account is now frozen or the company is in bankruptcy. 

• This is tricky! The law says if a debt could still be recovered…it is not totally worthless. IRC 166
• Until bankruptcy proceedings are finalized, there is still a chance of partial recovery
• Type of loss:
  1. Capital Loss?  Unlikely because a “sale or exchange” did not occur
  2. Theft Loss?  No longer deductible after TCJA
  3. Nonbusiness Bad Debt? Not until the bankruptcy is complete
  4. Abandonment?  Difficult because you cannot satisfy the 3 pronged test yet

Situation 4:

You were victim to an NFT or Crypto scam/hack or Ponzi scheme.  The asset/money is 100% gone.

• Capital Loss? An aggressive position, but possible in certain cases.
• Abandonment?The most controversial, but possible:
  • Did you invest with the intention of making a profit?
  • Did the cryptocurrency suddenly stop being valuable?
  • Is it a non depreciable property? 
  • Did you permanently discard the worthless coins? 

Can we utilize Revenue Rulings 2009-9 or 2009-20? The “Madoff” recovery rules