@worldtraveler78 wrote:
One tangential followup question: Luckily I had invested only a little bit (which I would have been comfortable losing with my stock trading on a risky stock) - if indeed this turns out to be a scam, can I claim this as a capital gains loss on my 2022 tax return? After all, if there had been gains, I would have had to report it as such, so it should be only fair that I can claim the loss.
That's a legal question, I can discuss the key points, but you will have to decide.
Theft losses are no longer deductible unless connected to a federally declared disaster. Capital losses are deductible. In times past, theft losses were deductible subject to a 10% deductible. Sometimes, there would be advantage to deducting 90% of loss right away as a theft, especially if you had no capital gains and could only take the capital loss at $3000 per year. The IRS had some thoughts on that. For example, a man discovered a valuable painting was a forgery, and deducted the loss as theft. The IRS denied and it went to Tax Court. No one disputed that the gallery and previous owner believed in good faith the the painting was genuine and the forgery must have occurred 80 year or more prior. The Tax Court ruled that for there to be a theft, there must be a thief, and since there was no one in the present situation who could be defined as a thief, the painting should be treated as a capital loss, not a theft, and even the capital loss could not be claimed until it was realized by selling the painting.
This creates an interesting situation with cryptocurrency. When someone announces a new coin, takes a few million dollars on day 1 from people with FOMO, and then disappears, that's clearly theft, not a capital loss, and the regulations would indicate it is not deductible. I don't know if there have been any Tax Court cases on this since it is a fairly new phenomenon.
So if you take a loss because of "exchange fees" (just the normal cost of doing business) that might be a capital loss, but if this is clearly theft (maybe the organizers get arrested at some point) then it's theft. The tax laws might revert to the old rules in 2026, but for now, theft is not deductible while a capital loss is deductible. I can't tell you what this would be, assuming you lose the money.
