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Orphaned Crypto Losses

crypto investing crypto tax May 05, 2023

Some losses are more valuable than others.

We're still fresh off of the original US individual tax deadline. It's still a good time to discuss crypto taxes since crypto tax season essentially never ends. In addition, the AICPA recently issued an IRS comment letter regarding the treatment of crypto losses. The Virtual Currency and Digital Asset Task Force (VCDATF) is a working group within the AICPA and I've been contributing to this group since 2018. The VCDATF issued this comment letter Guidance Needed on the Tax Treatment of Losses of Digital Assets.

18 pages 

Grab a cup of coffee and take what you want from this 18 page analysis. It's a testament to the general complicated nature of taxes considering it's just discussing some aspects of losses.

Not all losses are the same

There seems to be some chatter that every type of crypto loss is a capital loss the same as every other trade ending up in the red. Unfortunately, it's not the case. Let's discuss two types of losses covered in the comment letter:

  1. Abandonment
  2. Worthlessness 


What is abandonment? A taxpayer holds an asset for investment or business purposes and the asset no longer has economic value. In this case, a taxpayer needs to have both the intent to abandon and take an action to abandon the property. Think of an old obsolete piece of equipment taking up valuable floor space in a warehouse. Bill, the owner of ABC, Inc., can't install a new bigger piece of equipment because the old equipment is in the way. Bill gets XYZ scrap metal company to take the equipment for free. 

Crypto abandonment could take many forms, but burning tokens by sending them to a null address is strong evidence of intent and action. 


What is worthlessness? A taxpayer holds an asset that loses all of it's value and there is no market to sell the asset. Think about a pharma company with one FDA application that gets denied, the stock is delisted and becomes worthless. The catch is the asset has to be 100% worthless which can be difficult to prove. 

Crypto worthlessness is even more challenging because 18 decimal place tokens can have tiny amounts of value and may be traded in one market. 

Don't let tax season drain your profits. 
Avoid 7 Costly Crypto Tax Pitfalls

The 2017 tax cuts and jobs act wildcard 

The Jobs Act slashed the corporate tax rate from 35% to a mouth watering 21%. Tax cuts like this happen maybe once in a generation. The only way to provide a 21% tax rate on a silver platter is to take away other taxpayer benefits. Most itemized deductions were eliminated from 2108 to 2025 therefore even if you could perfectly nail abandonment and worthlessness you'd get ZERO tax benefit. 

Key Takeaway

Don't intentionally orphan your crypto assets to prove abandonment or worthlessness when you get NO benefit anyway. The best action is to take NO action and wait until after 2025 when your asset may be valuable again. 

If there is one thing I've learned in crypto it's this >>> You just never know in crypto. By the time 2025 rolls around you may be happy you still have those tokens. 

If you filed a return taking some of the aforementioned losses, then consider amending your tax return. 

Good luck and remember your goal is always a Crypto Bullseye™.

Yours in Crypto,

Kirk Phillips, CPA, CMA, CFE, CBP


DISCLAIMER: The information in this post can not be construed as tax, legal or investment advice because professional advice can only be dispensed with an official engagement letter. 


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