Generally, you can deduct an investment loss as a capital loss on schedule D. However, losses are not deductible until they are realized. That means that the investment is either declared worthless, or you sell it to someone else for a fraction of its original value. Speculative losses are not deductible until they are realized.
The amount of the loss depends on the cost basis, not the value of the property at the time that it was lost or destroyed. So if you paid $1000 for this investment, and it was theoretically worth $50,000 at one time, but is now worthless, the amount of your loss is $1000.
So the question is with respect to this particular investment, is it absolutely proven worthless, or is there a possibility that some part of the investment could be returned to you in a court proceeding, bankruptcy proceeding, or some other form of restitution? If some type of restitution is pending, then you can’t deduct a loss now. If you receive some restitution in the future, you would report the transaction is if you sold the investment for the amount of the restitution, and the remaining loss is a capital deduction.
Lastly, I want to point out that when cryptocurrency first became a thing, the IRS rule that it would be treated as personal property, in other words, similar to trading cards. Losses on personal property are never deductible. This means that somebody who had a few hundred dollars of cryptocurrency in their wallet and used it to buy and sell things, would owe capital gains tax if the cryptocurrency was worth more when they cashed it in than when they bought it, but they could not deduct a loss if the cryptocurrency was worth less when they cashed it than when they bought it. The IRS seems to allow a differentiation between cryptocurrency held for personal use, and cryptocurrency held for investments, and the idea that you can deduct your loss is based on the idea that this was held as an investment and not as personal property. However, for the amount involved, you may want to pay for an opinion from your own professional tax advisor.
