Bitcoin became a news sensation in 2017, when its value skyrocketed almost overnight to $20,000 per coin. A few years later, the non-fungible token also gained notoriety. Promoters of NFTs claimed that their uniqueness would turn them into collectibles, creating demand that would lead to a profit if they were later sold.
Despite the potential and promises, many cryptocurrencies and NFTs have gone bust in recent months, with swaths of investors losing most, if not all, of the value. In some cases, the creators and promoters were simply unable to achieve the goals they promised. But others were scams in which the creators had no intention of repaying their investors and would disappear after taking the investors’ money, also known as rug pulls.
While most crypto and NFT fraud victims will not get their investments back, they may be able to take advantage of tax benefits due to their losses. The most beneficial is the theft loss deduction, which can be used to offset ordinary income, although the Tax Cuts and Jobs Act has limited its use for personal losses.
The IRS’ definitive guidance concerning the US tax treatment of cryptocurrency is in Notice 2014-21. It states that, in general, such currency is treated like property, so the price paid for the cryptocurrency becomes the cost basis. If it is later sold, there is a capital gain or loss on the transaction. This notice is likely to apply to NFT transactions as well. Unfortunately, some taxpayers will not be happy with…
