If your Cryptocurrency is completely worthless and has no value, you can treat this loss as an abandonment loss under § 1.165-2 of the tax code. This is considered an ordinary loss versus a capital loss. According to this provision, you need to consider the following to determine if whether or not you qualify to take this loss under Section 165(a) of the tax code.
- Did you invest with the intention of making a profit?
- Did the cryptocurrency suddenly stop being valuable?
- Is it a non depreciable property? (yes: all cryptocurrencies are non-depreciable property)
- Did you permanently discard the worthless coins? (e.g. for example sending them to a null address?)
According to Cointracker, "If you answer “yes” for all of the above questions, you could treat your loss as an abandonment loss. Make sure you document the answers for these questions along with proof of your ownership of coins prior to abandonment, an intent to abandon the coins and the actions you took to abandon the property (three-prong test set by the tax courts). These records will come in handy in case the IRS questions your deduction.
Abandonment losses are reported on Form 4797, line 10. These losses are considered ordinary losses and not subject to capital loss limitation rules. You can report the loss in the year you incurred the loss, in other words, in the year you ceased ownership of the coins."
@akopac37
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