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I have a bunch of dead coins that don't have any liquidity on exchanges anymore. Is there a way to sell them or report them to the feds somehow so I can harvest my tax losses?

I read about a way that involved sending my coins to the 0x000..... address of the chain and then just reporting it to the IRS as a loss. But that method read like a troll post.

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2 Answers 2

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I would preface by saying it's probably best to contact a tax professional.

Beyond that this thread is semi relevant, albeit about illiquid penny stocks as opposed to crypto: How do I get rid of worthless penny stocks if there is no volume (so market/limit orders don't work) and my broker won't buy them from me?

Given the basis for crypto as investment tax treatment the following is relevant.

Rather topical is 26 CFR § 1.165-2 Obsolescence of nondepreciable property, which are IRS regulations concerning income tax and deductions, namely parapgraph (a):

§ 1.165-2 Obsolescence of nondepreciable property. (a) Allowance of deduction. A loss incurred in a business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in such business or transaction of any nondepreciable property, in a case where such business or transaction is discontinued or where such property is permanently discarded from use therein, shall be allowed as a deduction under section 165(a) for the taxable year in which the loss is actually sustained. For this purpose, the taxable year in which the loss is sustained is not necessarily the taxable year in which the overt act of abandonment, or the loss of title to the property, occurs.

To my understanding as long as the coins were purchased with the intention of making a profit, they suddenly stopped having value, it is nondepreciable property (which crypto is), and they are permanently discarded (such as sent to a null address) they could be considered abandoned property loss and thus written off. However, and very importantly to do so you would need to ensure everything is properly documented. Specifically, proof of ownership pre abandonment, intent to abandon, and what you did to abandon said property. Relevant tax court test: https://www.thetaxadviser.com/issues/2018/nov/loss-deductions-abandonment-intangible-assets.html

The losses would then be reported on the form 4797 line 10 as an ordinary loss.

See the following: https://www.cointracker.io/blog/write-off-cryptocurrencies-with-no-value

I am neither a lawyer nor tax professional, and would once again recommending speaking to either or both prior to taking any action.

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  • To which I'd add, double check yourself with the tax authority, or ask your tax adviser to.do so if unsure (crypto is new so this specific scenario may not be familiar either to tax advisers or IRS). Also disposal by its nature is irreversible and couldn't be redone, if it later was not deemed "done satisfactorily to prove disposal, bona fide nature and valuations, and tax loss".
    – Stilez
    Commented Feb 18, 2022 at 11:59
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    ...... So after getting advice, just notify IRS: "I have crypto XYZ in this form, which are worthless without a market or liquidity. I propose to dispose of them in line with (case/law citation) to realise the loss. Can you confirm that the following would be an acceptable method and what documentation you need of the assets, their acquisition, non-marketability, and relevant valuations for tax purposes, in order to agree that the loss should be allowed?"
    – Stilez
    Commented Feb 18, 2022 at 11:59
  • I think I would go with "be forgiven" rather than "get permission", unless we're talking taking billions in losses. First, the IRS will probably never respond to a "is this ok?" query, and second, in the highly unlikely event they question taking the loss, then the OP can respond citing the above regulation.
    – blm
    Commented Feb 22, 2022 at 18:38
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A worthless capital asset can be treated as if it was sold for $0 on the last day of the tax year.

The relevant law is 26 CFR § 1.165-5 - Worthless securities. The IRS has stated that this applies to cryptocurrencies and similar capital assets.

"If any security which is a capital asset becomes wholly worthless at any time during the taxable year, the loss resulting therefrom may be deducted under section 165(a) but only as though it were a loss from a sale or exchange, on the last day of the taxable year, of a capital asset."

Another option is to decide what it is worth and sell it to a friend for that amount. You may, for example, find someone willing to buy it for $1 (possibly as a favor to you). With stocks, many brokers offer this as a service to get the stock off your hands if there's no good way to get rid of it.

Here's an excerpt from my 8949 showing such a transaction:

enter image description here

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    The coins may not necessarily be worthless and trigger the provision, in this case the lack of liquidity and inability to trade (but potential value) doesn't inherently mean they are worthless/ untradeable.
    – Dot_plot21
    Commented Feb 19, 2022 at 20:35
  • @Dot_plot21 Agreed. Either you want to realize losses or you don't. If you do, just find a friend who will them from you for $1 or even $0. Commented Feb 20, 2022 at 1:59
  • That's true, that's a fair point.
    – Dot_plot21
    Commented Feb 20, 2022 at 2:43

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