CryptoCurrency Scams

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CryptoCurrency Scams – What You Need to Know

If you’ve been a victim of a cryptocurrency scam, there are several potential tax implications depending on your situation. Here’s what you need to know:

1. Overview & Context

What is CCA 202511015?

• It is a Chief Counsel Advice memorandum (nonbinding IRS internal guidance) addressing whether victims of scams may deduct theft losses under Internal Revenue Code § 165.
• It is not a regulation or ruling, but it reflects the IRS’s internal legal view and is often persuasive in audits or disputes.
• It was issued to address a request from IRS area counsel (Manhattan) for guidance on multiple hypothetical taxpayers who lost money to scams in 2024.

Why it matters (especially for crypto/online scams):

• The legal terrain for theft-loss deductions has been murky, especially after the Tax Cuts and Jobs Act (TCJA) limited personal casualty and theft losses for tax years 2018–2025.
• Scam victims—especially of crypto, phishing, pig butchering, romance, or impersonation scams—have long wondered whether their losses are deductible and how to show it. This memorandum gives clearer signals from the IRS.

Limitation:

• Because it’s an internal “advice memorandum,” it’s not legally binding on courts. But it signals the IRS’s thinking, and may influence audit positions.
• Its conclusions depend heavily on facts; real taxpayers must carefully map their situation to the hypotheticals.
• It does not change statutory law or override existing limitations in the tax code (e.g. TCJA’s limitation on personal theft losses) unless and until Congress acts.

2. Legal Framework (Statutes, Regs, Precedents)

To understand how the IRS reached its conclusions, we need to know the key legal provisions and constraints.

Key Code & Regulation Provisions

Ponzi Safe Harbor — Rev. Proc. 2009-20

• There is a safe harbor in Rev. Proc. 2009-20 (as modified by Rev. Proc. 2011-58) for investors in “specified fraudulent arrangements” (i.e. Ponzi schemes) under certain conditions.
• To qualify, taxpayers must be “qualified investors,” have “qualified losses,” invest in “qualified investments,” and the arrangement must be specified fraudulent, and the operator must be indicted or the subject of a criminal complaint.
• The IRS in this memorandum finds that in the hypothetical cases, none of the examples satisfied the safe harbor, so they had to rely solely on § 165 analysis.

Burden of Proof & Factual Showing

• Because these are theft-loss claims, taxpayers must show:
  1. There was a theft under state law (i.e. illegal taking with criminal intent).
  2. No reasonable prospect of recovering the funds (i.e. loss is fixed).
  3. The amount of the loss (usually equal to basis, reduced by any recoveries or expected reimbursements).
  4. That the transaction was entered into for profit (if relying on § 165(c)(2)).
• The memo also emphasizes that real facts matter: each case must be analyzed per the taxpayer’s circumstances.

3. Hypothetical Cases in the Memo & Their Analysis

In CCA 202511015, the IRS presents five hypothetical taxpayers (Taxpayers 1–5), each scammed in different ways during 2024. The IRS walks through whether each may deduct a theft loss under § 165, and why or why not.

Here’s a summary of each:

Other common threads / observations in these cases:

• All taxpayers discovered the fraud in 2024 and determined there was no reasonable prospect of recovery in the same year. Thus, the IRC § 165 loss year is 2024 for all.
• None of these examples qualified for the Ponzi safe harbor (Rev. Proc. 2009-20), because the frauds were not structured as “specified fraudulent arrangements” with criminal indictments, etc.
• The IRS emphasizes that these are illustrative — a real taxpayer must map their fact pattern carefully.

4. Key Rules & Doctrines Drawn from the Memo (Summary)

From the IRS’s reasoning, the following distilled principles emerge. These are critical for anyone seeking to apply this guidance to a real crypto/scam loss scenario.

4.1 Year of Deduction (“When loss occurs”)

• Under § 165(e) and Reg. § 1.165-1(d), a theft loss is considered sustained in the year when:
  1. The taxpayer discovers the theft, and
  2. Determines there is no reasonable prospect of recovery.
• If there’s a reasonable chance of recovery, deduction must wait until the year when that expectation drops to zero.

4.2 Amount of Loss

• The deductible amount is generally the taxpayer’s basis in the stolen property/funds, reduced by any amounts recovered or expected to be recovered.
• The IRS treats the fair market value immediately after theft as zero (i.e. total loss).

4.3 Profit Motive Requirement

• To deduct under § 165(c)(2), the loss must arise from a transaction entered into for profit, even if it isn’t part of a business.
• The memo expands the idea: even efforts to protect existing investment funds (e.g., complicit transfers to avoid further loss) may be viewed as part of that profit-motive transaction.
• If a transfer is made for purely personal reasons (e.g. romance scam, ransom), the profit-motive leg fails, and the loss is a personal theft (subject to § 165(c)(3)), which TCJA disallows for 2018–2025.

4.4 Ponzi Safe Harbor Inapplicable Generally

• The memo confirms that the Ponzi scheme safe harbor under Rev. Proc. 2009-20 is not available unless very narrow requirements are met (e.g. indicted operator, specified fraudulent arrangement).
• In the hypotheticals, the IRS finds none of the scammers or schemes qualify, so taxpayers must rely on general § 165 principles, not safe-harbor treatment.

4.5 Interaction with TCJA’s Limitation

• Under § 165(h), for tax years 2018–2025, personal casualty or theft losses are disallowed except for federally declared disasters.
• Thus, only those theft losses that satisfy the profit-motive (i.e. § 165(c)(2)) can be deductible. Personal-scheme victims are generally excluded under current law.

5. How to Use CCA 202511015 in Real Cases (Especially Crypto Scams)

Here is a practical playbook to assess whether your crypto scam loss may be deductible under the logic of this IRS memorandum.

1: Characterize the Scam / Facts Carefully

• What type of scam was involved (pig butchering, phishing, account compromise, romance, ransom, etc.)
• From which account(s) were funds taken (IRA, brokerage, non-retirement)
• When you first learned of the scam, and when you determined recovery was unlikely
• What steps you took (reporting, efforts to recover, etc.)
• Your intent/motive in making or moving the funds — was profit expected?

2: Map to § 165 Categories: c(1), c(2), or c(3)

• If your loss is from a trade or business, it might fall under § 165(c)(1) (rare for personal exposures).
• More likely, see if it qualifies under § 165(c)(2): a transaction entered into for profit
  • If yes, it may be deductible (subject to other constraints).
• If not profit-motive, it is a personal casualty/theft loss under § 165(c)(3). But from 2018–2025, most of these are disallowed under § 165(h) unless disaster-based.

3: Ensure Loss Year & Reasonable Prospect of Recovery

• The deduction must be taken in the year you discover the theft and determine that recovery is not reasonably likely.
• Maintain records that document your efforts and the conclusion that recovery is unlikely.

4: Compute the Loss

• Establish your basis in the funds/assets stolen.
• Reduce by any actual or expected recoveries or reimbursements.
• Loss is treated as ordinary (not capital) if under § 165 (not under capital loss rules).

5: Documentation & Supporting Evidence

Gather and preserve:

1. Communications with financial institutions, law enforcement, exchanges, etc.
2. Police / fraud reports, case numbers
3. Correspondence / notices showing attempts to recover
4. Screenshots, chat logs, transaction records (showing how transaction was pitched, expected returns, misrepresentations)
5. Evidence of your profit motive (e.g. your usual investment strategy, statements, prior investing behavior)
6. Statements showing value / basis of funds/assets
7. Timeline showing discovery and when you concluded that recovery was improbable

If audited, you will need to show not just that a scam occurred, but that your loss meets all the legal tests (theft, fixed loss, no recovery, profit-motive, etc.).

6: Tax Return Reporting

• Use Form 4684 (Casualties & Thefts), Section B (for business/investment property) if claiming under § 165(c)(2).
• Report the deduction in the year of loss (discovery + no recovery).
• If deduction is large and exceeds income, it may generate a Net Operating Loss (NOL) which can be carried forward (or back if law permits) under the NOL rules.
• Remember: this is not a capital loss deduction (so it avoids the $3,000 capital loss limitation).

7: Consider Amending Prior Returns

• If your discovery year is in the past and within the statute of limitations, you may be able to amend your tax return to claim the theft-loss deduction for that year.
• But watch statute of limitations, and whether the loss would generate an NOL (which might have to be carried forward).
• Also check whether recognition of income (e.g. from IRA/401(k) distributions) in earlier years aligns with when you deduct the loss — there could be timing mismatches. The IRS memo and related commentary warn of this mismatch.

6. Limits, Caveats & Open Questions

IRS Guidance on Scam Losses: What It Doesn’t Solve

Even with the IRS’s recent guidance, significant limitations and uncertainties remain for taxpayers trying to deduct losses from scams, especially crypto-related schemes. Here’s what you need to know:

1. IRS Advice Is Not Binding

While the IRS has issued memoranda, these documents do not carry the weight of formal regulations or rulings. Courts and future IRS examiners are not bound by them. This means your claim can still be challenged—even if it follows IRS guidance.

✅ Key takeaway: You need strong factual support and documentation to survive an audit or examination.

2. Personal Loss Restrictions Under TCJA Still Apply

The Tax Cuts and Jobs Act (TCJA) eliminated deductions for personal casualty and theft losses unless connected to a federally declared disaster.

This restriction under IRC §165(h) remains in place from 2018 through at least 2025. If Congress doesn’t act, it may be extended further.

✅ Atlanta tax professionals warn: If your loss wasn’t related to a profit-motivated transaction, it’s likely not deductible.

3. You Must Prove No Reasonable Prospect of Recovery

One of the biggest hurdles is showing that the loss is “fixed” and that no reasonable recovery is possible.

IRS examiners may argue that:

• You still have pending lawsuits
• Accounts are frozen but not closed
• You might still recover some funds

✅ Documentation is crucial—you must show finality with no realistic chance of recovery.

4. Profit Motive Can Be Disputed

The IRS may argue that your investment was simply a bad decision, not theft.

To meet the §165 standards for deductibility:

• Show clear profit motive
• Demonstrate consistent investment behavior
• Explain your due diligence

✅ This is especially important in Atlanta tax preparation services, where documentation and intent must align.

5. Ponzi Safe Harbor Often Doesn’t Apply

In traditional Ponzi schemes, a special safe harbor may allow quicker deductions. However, crypto scams and newer fraud models often fall outside this safe harbor.

• The IRS is reluctant to apply the safe harbor broadly
• You may need to rely solely on standard §165 rules

✅ These claims require a tax accountant experienced in IRS scam loss cases.

6. Tax Timing Mismatches Are Common

If the scam forced you to take early distributions from an IRA or 401(k), you paid taxes on that income in a prior year.

However, the deduction for the loss may not occur until the year you discovered the fraud.

✅ This mismatch can lead to limited or no relief, especially if you’re past the refund statute of limitations.

7. Time Limits May Block Relief

If the fraud is discovered after the three-year statute of limitations on refunds, you could lose the right to recover taxes paid.

Some tax professionals advocate for extended deadlines for scam victims, but current IRS policy does not provide automatic relief.

8. Exchange Bankruptcies Remain a Gray Area

The IRS memo offers little guidance for cases involving bankruptcies of crypto exchanges like FTX or Celsius.

• These large-scale failures raise new legal questions
• Some tax experts believe legislation is needed to close the gap

✅ If you’re affected by an exchange failure, work with a tax resolution specialist who understands complex crypto-related losses.

7. Illustrative Examples (Adapted & Expanded)

To bring the concepts together, here are two example scenarios and how you’d analyze them using CCA 202511015’s reasoning.

Example A: Crypto Pig-Butchering Scam

• You invest $200,000 of personal funds (non-IRA) into a supposed high-yield crypto platform.
• Initially, small withdrawals “work” and you increase investment.
• Later you try to withdraw, but the platform blocks access and disappears.
• You realize you’ve been scammed in late 2024, and after investigation conclude recovery is impossible.

Analysis (following CCA logic):

• This is a transaction entered into for profit, so § 165(c)(2) route is available.
• Year of deduction: 2024 (discovery + no recovery).
• Amount = your basis (i.e. $200,000, adjust for any partial return).
• It’s not a Ponzi scheme safe-harbor case unless the scheme meets the narrow criteria (operator indicted, specified arrangement).
• You file Form 4684, Section B; deduct as ordinary theft loss (not capital).

This example parallels the IRS’s Taxpayer 2 scenario.

Example B: Romance / Impersonation Crypto Scam

• You meet a “partner” online, they ask for crypto “as investment in a future joint project.”
• You send $50,000, but the investment never exists and you never recover.
• You learn the fraud in 2024 and determine recovery is unlikely.

Analysis:

• The profit-motive test is weak: funds were sent largely based on personal relationship, not investment return expectations.
• Hence, the scheme likely falls under § 165(c)(3) (personal theft) — not deductible for 2018–2025 under § 165(h).
• The memo presents analogous scenarios (Taxpayers 4 and 5) where personal-intent or ransom schemes are denied deductions.

Thus, the taxpayer likely cannot deduct the loss under the “theft loss” approach. (They might explore whether a capital-loss treatment is possible, but that is separate.)

8. Practical Takeaways & Strategic Tips

Here’s a distilled guide you can use (or share) if considering applying the memo’s logic to a crypto scam loss.

1. Don’t assume all crypto scam losses are non-deductible.
   The memo opens a pathway for many investment-based crypto frauds to qualify under § 165.
2. Focus on establishing profit motive.
   Document how you treated the funds as investments, your intent, communications, promises made to you, etc. The stronger your case on motive, the better.
3. Document your discovery and loss finality.
   Keep timelines, correspondence with exchanges, authorities, attempts to recover, etc.
4. File timely; consider amending prior returns if within statute.
   If your discovery was in a prior year and you’re still within the refund window, you may be able to amend back and claim. But watch limitations.
5. Use Form 4684, Section B (for business/investment property losses) rather than capital loss treatment (if claiming under § 165).
6. Don’t rely solely on CCA 202511015 — get substantiation.
   Because the memo is not binding, you must build your own evidentiary record.
7. Monitor legislative changes.
   Many commentators expect or hope that Congress will revise § 165(h) or other rules to better protect scam victims post-2025.
8. Be cautious about audit risk and IRS challenge.
   Large claims will invite scrutiny. Be prepared to defend motive, loss, recovery expectation, etc.
9. Consult a tax professional experienced in crypto and theft-loss issues.
   This is a complex intersection of tax law, fraud, and fact-intensive analysis.

9. Summary Table: What Is & Isn’t Deductible under CCA 202511015

If you’re in need of CryptoCurrency Scam Assistance or other tax resolution services, contact a trusted Atlanta cpa tax professional at EAS Income Tax Services today. Call us at (404) 719-0330 or email us at GLG@eas.tax to schedule a consultation.