On January 13, 2023, the Internal Revenue Service (IRS) released a Chief Counsel Advice Memorandum (CCA 202302011) concluding that taxpayers cannot claim a deduction for cryptocurrency losses that have, absent a sale or other taxable disposition, substantially declined in value if such cryptocurrency continues to trade on at least one cryptocurrency exchange and has a value that is greater than zero.

Additionally, for individual taxpayers that purchased cryptocurrency for personal investment purposes, even if they could claim a deduction for cryptocurrency losses because of worthlessness or abandonment, the memorandum concludes that such deductions are generally disallowed due to the limitations on miscellaneous itemized deductions for tax years 2018 through 2025.

Throughout this article, we look at the key considerations taxpayers should keep in mind if they wish to claim deductions for cryptocurrency losses.


Generally, any loss sustained during a tax year in connection with a trade or business or in a transaction entered into for profit is deductible under Internal Revenue Code (Code) Section 165 unless it is compensated for by insurance or otherwise. A loss is treated as sustained during the tax year in which the loss occurs if it is evidenced by closed and completed transactions, fixed by identifiable events, and, with certain limited exceptions, is actually sustained during the tax year. A loss is not sustained to the extent there exists a claim for reimbursement—if there is a reasonable prospect of recovery—until the tax year during which it can be ascertained with reasonable certainty that the claimed reimbursement will not be received. No deduction is permitted if the loss arises solely as a result of a decline in the value of property owned by the taxpayer due to market fluctuations or other similar causes. However, a loss arising from theft is permitted and is treated as sustained during the tax year in which the taxpayer discovers the loss (provided that no claim for reimbursement exists). Theft includes embezzlement, robbery and larceny, among other items.

If any “security” that is a capital asset becomes worthless during the tax year, the resulting loss is treated as a loss from the sale or exchange of a capital asset on the last day of the tax year. A security for this purpose means a share of stock in a corporation; a right to subscribe for or to receive a share of stock in a corporation; or a bond, debenture, note, certificate or other evidence of indebtedness issued with interest coupons in registered form by a corporation, a government or a governmental political subdivision.

Abandonment losses incurred in a trade or business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in the trade or business or the transaction of any non-depreciable property can also give rise to a deduction if such business or transaction is discontinued or where such property is permanently discarded from use therein. To prove permanent abandonment, a taxpayer must show evidence of an intention to abandon the property and an affirmative act of abandonment.

For individual investors that purchased cryptocurrency for personal investment purposes, losses from worthlessness or abandonment are classified as miscellaneous itemized deductions. However, under current law, losses characterized as miscellaneous itemized deductions are disallowed for tax years beginning after December 31, 2017, and before January 1, 2026. Accordingly, even if a taxpayer can establish losses for worthlessness or abandonment before 2026, the deduction would be disallowed. In contrast, losses relating to casualty, theft and wagering are not classified as miscellaneous deductions and would not be disallowed.



The memorandum considers a fact pattern where a taxpayer purchased cryptocurrency in 2022 for personal investment purposes. After the taxpayer acquired the cryptocurrency, its value decreased significantly to the point where its value was less than one cent at the end of 2022, though the cryptocurrency continued to be traded on at least one cryptocurrency exchange. The taxpayer maintained dominion and control over the cryptocurrency, including having the ability to sell, exchange or transfer it. The taxpayer claimed a deduction on their 2022 tax return and took the position that the cryptocurrency was either worthless or abandoned.

Worthless Cryptocurrency

The IRS stated that while the cryptocurrency had substantially decreased in value, there was no deductible loss because its value was greater than zero, it continued to be traded on at least one cryptocurrency exchange and the taxpayer did not sell, exchange or otherwise dispose of the cryptocurrency. The IRS relied on existing case law that states that the “mere diminution in value of property does not create a deductible loss. An economic loss in value of property must be determined by the permanent closing of a transaction with respect to the property. A decrease in value must be accompanied by some affirmative step that fixes the amount of the loss, such as abandonment, sale, or exchange.” Additional case law states that there must be an identifiable event that supports the fact that there is no current liquidating value and no value to be acquired in the future. Because the cryptocurrency still had a liquidating value (even if it was valued at less than one cent) and because it was still possible for the value to increase in the future given that it was traded on at least one cryptocurrency exchange, the cryptocurrency in question was not wholly worthless during 2022 as a result of its decline in value and the taxpayer did not sustain a bona fide loss under Code Section 165(a) because of worthlessness.

Abandoned Cryptocurrency

To claim a loss under Code Section 165 for abandoned property, (1) the loss must be incurred in a trade or business or in a transaction entered into for profit, (2) the loss must arise from the sudden termination of usefulness in the trade, business or transaction and (3) the property must be permanently discarded from use or from a transaction that is discontinued. The IRS determined that the taxpayer did not abandon the cryptocurrency in 2022 for Code Section 165(a) purposes because the taxpayer did not take any action to abandon and permanently discard the cryptocurrency. The taxpayer also did not demonstrate an intent to abandon the property nor did the taxpayer demonstrate any affirmative act of abandonment.

Instead, the taxpayer maintained ownership of the cryptocurrency through the end of 2022 and retained the ability to sell, exchange or otherwise dispose of the cryptocurrency. Furthermore, the taxpayer continued to exert dominion and control over the cryptocurrency and, regardless of intent, did not take any affirmative steps to abandon the property during 2022.


This guidance takes the form of a Chief Counsel Advice Memorandum, which is generally issued to lawyers and revenue agents within the IRS. The memorandum has no precedential value and cannot be relied on by taxpayers (or cited as precedent). Nonetheless, many taxpayers take such guidance into account as it is useful for understanding the IRS’s current position on a certain issue, particularly when there is no other guidance available. The IRS could adopt a different position on the same or a similar issue and such a position would not require the withdrawal of the memorandum.


Since miscellaneous itemized deductions may be available again in the future, taxpayers may still wish to know how these deductions can be claimed. The memorandum provides that, in order for a taxpayer to take a deduction on a tax return for a loss under Code Section 165, the taxpayer must show evidence of either (1) an identifiable event that supports the fact that there is no current liquidating value of the applicable cryptocurrency or any possibility for future appreciation or (2) intent to abandon the cryptocurrency, coupled with an affirmative act of abandonment.

In the last 12 months, many cryptocurrency protocols have been subject to exploits and hacks that have left taxpayers with losses due to theft exceeding $2 billion (e.g., the Ronin bridge hack and the Wormhole bridge exploit). During the same period, several cryptocurrency exchanges filed for Chapter 11 bankruptcy protection in the United States. With respect to theft losses, provided that such taxpayers can show evidence of the theft and the amount of loss and are not entitled to receive any reimbursement through insurance or otherwise, such taxpayers may be able to deduct such losses on their tax returns. However, with respect to the cryptocurrency exchanges that are currently going through the Chapter 11 bankruptcy process, the answer is less clear given the uncertainty as to whether such taxpayers are entitled to reimbursement (e.g., as a creditor).

The most common way to abandon cryptocurrency is to send it to a null address (also known as a burn address), which takes the cryptocurrency out of circulation so it cannot be used by any person going forward. Such action should be treated as evidence supporting forfeiting of dominion and control over the cryptocurrency. Other methods of abandonment could involve transferring a taxpayer’s right (or claim) to receive any currency to another party.


While the memorandum is helpful in providing insight into how the IRS is considering guidance related to cryptocurrency, given the limited facts, questions remain with respect to whether a taxpayer can claim a loss deduction for cryptocurrency losses. For example, the memorandum does not provide any discussion regarding the tax consequences of a taxpayer that does not have the ability to abandon (or take other action with respect to) the cryptocurrency since it is frozen on a cryptocurrency exchange (e.g., in the case of a cryptocurrency exchange undergoing the Chapter 11 bankruptcy process that has suspended withdrawals and/or other actions).

While existing guidance provides that Bitcoin and Ethereum are likely to be treated as commodities because futures on these cryptocurrencies are traded on a commodities exchange, on March 28, 2022, the US Department of the Treasury (Treasury) released the Fiscal Year 2023 Revenue Proposals and Green Book, which extended the definition of security to include actively traded digital assets that are recorded on cryptographically secured distributed ledgers in other areas of the Code (e.g., loans of securities under Code Section 1058). Given the recent events of the overall cryptocurrency industry, the Treasury may consider extending the expansion of the definition of security to Code Section 165, however, no indication has been made.

The IRS has recently issued several memoranda on topics related to cryptocurrency and representatives of the IRS have indicated that further guidance is forthcoming.