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Short version is that I bought crypto by way of trading BTC/ETH into the coin of discussion and the blockchain of that coin was shutdown. I can't access the balance in my wallet (and never will). Can I claim this as a loss on my taxes?

Additionally, what can I submit as proof to IRS in case of audit as I only have outgoing transactions from Coinbase (which does provide the cost basis).

I've seen mixed messaging on this topic but this article leads me to believe I can: https://coinledger.io/blog/reporting-stolen-or-lost-cryptocurrency-for-tax-purposes#can-i-claim-a-tax-deduction-on-a-crypto-nft-scam-


Longer version:

Several years ago I made BTC transactions totaling slightly over $1000 to purchase a cryptocurrency that has recently "shutdown". This cryptocurrency development team claims that the overall system was not technologically viable (if you will) and they need to restart with a different code base. In order to get the amount of crypto that was previously held, they instruct us to purchase a voucher of equal amount and then they will essentially double what you had.

The crypto's blockchain is dead, their app and servers are defunct. In fact, I can't capture any screenshot of my held balances or get my address because of this. There is no way for me to interact with any previously held crypto from them without first paying them more money and its at this point that I am walking away.

My question is if I can claim this as a capital gains loss. I have seen mixed information online and when entering this amount in a tax software as an "Stock or Investment Sold" (per info from link above) it adds to my refund amount. Also if I can claim this, how can I prove to the IRS if audited any of this information as pretty much all I have are the originating transactions from Coinbase.

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Didn't read the whole thing. Generally, you would not get tax advice from random people on the Internet (be it here or on some crypto scam pump site). You'd want to discuss your specific situation with your licensed tax adviser (EA, or a CPA or Tax Attorney licensed in your State).

What that article does is basically covering all the possible ways things can go wrong, but where you fall in that range is really hard to tell with the information provided.

Is it a case of a scam/theft/manipulation where you were tricked into giving something up? Is it a genuine investment gone wrong? Who knows, and the answer to the tax question depends on it.

For most parts, crypto losses like this are generally scams and not genuine investments, and scam losses are non-deductible. You've essentially been duped into giving your money to someone. You'll need to talk to a licensed tax professional for a more thorough analysis.

Don't forget to report the sale of your BTC/ETH, since that is also a tax event.

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    Does the exchange still count as a sale for capital gains purposes if the new crypto was a scam? Commented Feb 8 at 19:48
  • @GS-ApologisetoMonica of course
    – littleadv
    Commented Feb 8 at 21:17
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    Hmmm... IRC Sec. 61(a)(3)? Nothing there that conditions recognition of income based on the intended use of the gains. Sec. 1031 excludes dealing with crypto (source for prior to TCJA, post TCJA Sec. 1031 is only for real estate). So unless it's in a tax-shielded account, yes - it's taxable.
    – littleadv
    Commented Feb 8 at 22:29
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    @littleadv thank you that is helpful. It sounds like one option may be to pursue the recovery and sell at a loss for 2024 taxes.
    – Jeremy
    Commented Feb 11 at 5:04
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    Just a reminder - the advice you get here is worth what you paid for it. For a reliable opinion talk to a licensed tax advisor
    – littleadv
    Commented Feb 11 at 5:41

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