Crypto Exchange Bankruptcy Asset Recovery Tax Treatment 2026: How to Report Lost or Recovered Crypto

Quick Answer

When a cryptocurrency exchange files for bankruptcy, affected users can generally claim their losses as theft losses on IRS Form 4684. However, the Tax Cuts and Jobs Act (TCJA) suspended personal casualty and theft loss deductions from 2018 through 2025 for non-disaster losses. Starting in 2026, the TCJA suspension expires, meaning individual taxpayers can once again deduct theft losses from crypto exchange bankruptcies — provided the losses qualify under IRS rules. If you receive recovered assets through bankruptcy proceedings, you may need to report them as income or adjust your previously claimed loss, depending on how and when you originally reported the loss.

Key Takeaways

• The TCJA theft loss suspension expires at the end of 2025, making crypto exchange bankruptcy losses deductible again starting in the 2026 tax year.
• Crypto exchange bankruptcy losses are generally classified as theft losses rather than casualty losses, since they result from fraudulent or criminal acts by exchange operators.
• Form 4684 (Casualties and Thefts) is the primary form used to report crypto bankruptcy losses on your federal tax return.
• The deductible loss amount is the difference between your cost basis and the asset’s fair market value at the time of the bankruptcy filing.
• Recovered assets from bankruptcy proceedings may create taxable income or require adjustment of previously claimed loss deductions.
• State tax treatment of crypto bankruptcy losses varies significantly — some states allow the deduction while others do not conform to federal rules.
• Proper documentation including account statements, transaction records, and bankruptcy court filings is essential to substantiate your loss claim.
• The 2026 tax law changes restore individual theft loss deductions but also introduce new reporting requirements for cryptocurrency transactions via Form 1099-DA.

Major Crypto Exchange Bankruptcies: An Overview

The cryptocurrency industry experienced a wave of high-profile exchange bankruptcies from 2022 through 2024, affecting millions of users and tens of billions of dollars in assets. Understanding these bankruptcies is critical for determining the correct tax treatment of your losses and any subsequent recoveries.

FTX (November 2022)

FTX, once the second-largest cryptocurrency exchange in the world, filed for Chapter 11 bankruptcy on November 11, 2022, after revelations that customer funds had been misappropriated by its affiliate Alameda Research. Founder Sam Bankman-Fried was later convicted of fraud and conspiracy. At the time of collapse, FTX had an estimated 1 million creditors and owed approximately $11 billion in customer liabilities. The bankruptcy proceedings have been among the most complex in history, involving hundreds of subsidiary entities across multiple jurisdictions.

For tax purposes, FTX users faced an immediate question: when does the loss become deductible, and what is the deductible amount? The IRS has not issued specific guidance for FTX, but general principles of theft loss treatment apply. The loss is generally recognized in the year the theft is discovered — for most FTX users, this was 2022. FTX began distributing recovered assets to creditors in 2024 and 2025, with many users receiving a percentage of their claims in cash and cryptocurrency.

Celsius Network (July 2022)

Celsius Network, a major crypto lending platform, filed for Chapter 11 bankruptcy on July 13, 2022, freezing approximately $4.7 billion in customer assets. The company’s CEO Alex Mashinsky was later arrested and charged with fraud. Celsius had offered high-yield “Earn” accounts that the SEC and other regulators later deemed unregistered securities offerings.

Celsius users who had assets on the platform faced unique tax questions because Celsius offered both interest-bearing accounts and custody accounts. The treatment differs depending on the type of account. Earn account holders were classified as unsecured creditors, while custody account holders had a stronger legal claim to their assets. Celsius emerged from bankruptcy in 2024 with a reorganization plan that distributed a combination of cash and new equity to creditors.

Voyager Digital (July 2022)

Voyager Digital filed for bankruptcy on July 5, 2022, after the collapse of Three Arrows Capital (3AC) left Voyager unable to meet obligations. Voyager had extended significant loans to 3AC, which defaulted when 3AC itself collapsed. Approximately 3.5 million users were affected, with over $1.3 billion in customer assets frozen.

Voyager’s bankruptcy was relatively straightforward compared to FTX and Celsius, but users still faced significant uncertainty. Initially, Voyager proposed selling its assets to FTX — which itself collapsed before the deal could close. The assets were eventually sold to Binance.US, and users received partial recoveries. Voyager completed its liquidation proceedings in 2024.

BlockFi (November 2022)

BlockFi filed for Chapter 11 bankruptcy on November 28, 2022, just weeks after the FTX collapse. BlockFi had been heavily reliant on FTX for liquidity, and the failure of FTX triggered a cascading effect. BlockFi owed approximately $275 million to its creditors and had over 400,000 users with frozen accounts.

BlockFi had previously reached a settlement with the SEC in 2022 regarding its BlockFi Interest Accounts (BIAs), which were deemed unregistered securities. This added a layer of regulatory complexity to the bankruptcy proceedings. BlockFi’s reorganization plan was confirmed in 2024, and creditors began receiving distributions.

IRS Guidance on Casualty Losses vs. Theft Losses for Crypto

The IRS distinguishes between two types of losses relevant to crypto exchange bankruptcies: casualty losses and theft losses. The distinction matters because the tax treatment differs significantly.

Casualty Losses

A casualty loss results from an identifiable event that is sudden, unexpected, or unusual — such as a fire, hurricane, earthquake, or other natural disaster. Importantly, investment losses or declines in the value of property do not qualify as casualty losses. If your crypto simply lost value because the market declined, that is not a casualty loss — it is an unrealized capital loss that can only be recognized through an actual sale or disposition.

Theft Losses

A theft loss, by contrast, results from the taking and removing of property with the intent to deprive the owner of it. Crypto exchange bankruptcies involving fraud — such as FTX, where customer funds were explicitly misappropriated — clearly qualify as theft losses. The IRS has long held that losses from Ponzi schemes and similar fraudulent arrangements qualify as theft losses under Section 165(c)(3) of the Internal Revenue Code.

For crypto exchange bankruptcies, the key question is whether the loss resulted from a criminal act. If the exchange simply failed due to poor business decisions without fraud, the loss may not qualify as a theft loss. However, most major crypto exchange failures (FTX, Celsius, Voyager) have involved criminal proceedings, making theft loss treatment more likely.

The Section 165 Framework

Section 165 of the Internal Revenue Code governs the deduction of losses. For individual taxpayers, the relevant subsections are:

• Section 165(c)(2): Losses incurred in a transaction entered into for profit, though not connected with a trade or business. This covers investment losses.
• Section 165(c)(3): Losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from theft. This is the theft loss provision.

Most crypto exchange bankruptcy losses will be analyzed under Section 165(c)(3) as theft losses, since the losses arise from the fraudulent taking of property by exchange operators.

The TCJA Suspension and Its 2026 Expiration

The Tax Cuts and Jobs Act of 2017 made a critical change to personal casualty and theft loss deductions. For tax years 2018 through 2025, Section 165(h)(5) was amended to provide that personal casualty and theft losses are deductible only if they are attributable to a federally declared disaster. This effectively suspended the deduction for most theft losses, including those from crypto exchange bankruptcies.

What Changed in 2026

The TCJA’s suspension of personal casualty and theft loss deductions expires on December 31, 2025. Starting January 1, 2026, individual taxpayers can once again deduct theft losses that are not connected to a federally declared disaster. This means crypto exchange bankruptcy losses occurring in 2026 and beyond — as well as theft losses discovered in 2026 — are potentially deductible again.

This is a significant development for crypto investors. If you discovered a theft loss in 2022, 2023, or 2024 but could not deduct it because of the TCJA suspension, you may be wondering whether you can claim it now. Unfortunately, you generally cannot carry back a theft loss deduction to a prior year where the deduction was suspended. The loss is deductible in the year it is discovered, and if that year falls within the suspension period, the deduction is lost — unless you have a federally declared disaster connection.

However, there is an important nuance: if you are still in the process of pursuing recovery and the theft loss is not yet “finalized,” you may have arguments for claiming the loss in 2026 when the deduction is available again. This is a complex area where professional tax advice is essential.

Interaction with the 2026 Tax Law Changes

In addition to the TCJA expiration, several other tax law changes take effect in 2026 that are relevant to crypto investors:

1. Top marginal rate reversion: The top individual income tax rate reverts from 37% to 39.6%, making loss deductions more valuable.
2. Form 1099-DA reporting: Starting in 2026, cryptocurrency exchanges must issue Form 1099-DA to report digital asset transactions, increasing transparency and making it easier to document losses.
3. Itemized deduction limitation: The limitation on itemized deductions returns, which may affect how much of your theft loss you can actually benefit from.
4. PEP and Pease limitations: The Personal Exemption Phaseout and Pease limitation on itemized deductions return in 2026, potentially reducing the tax benefit of large theft loss deductions for high-income taxpayers.

How to Claim and Quantify Crypto Bankruptcy Losses

Determining the amount of your deductible loss from a crypto exchange bankruptcy requires careful calculation. The IRS uses specific rules to measure both the amount of the loss and the amount you can deduct.

Determining the Loss Amount

For theft losses under Section 165, the deductible loss is the lesser of:

1. Your adjusted basis in the stolen property (generally your cost to acquire the cryptocurrency, including fees), or
2. The decline in fair market value of the property resulting from the theft.

In the context of a crypto exchange bankruptcy, the loss is essentially your cost basis in the assets that were on the exchange. If you deposited $50,000 worth of Bitcoin onto FTX and the exchange collapsed, your loss is $50,000 (assuming zero recovery). However, the calculation becomes more complex if you had unrealized gains or losses on those assets.

For example, if you purchased 1 BTC for $30,000 and deposited it on FTX when it was worth $50,000, your adjusted basis is $30,000. Your deductible theft loss is $30,000 — the lesser of your basis ($30,000) and the decline in FMV ($50,000). The $20,000 unrealized gain is not included in the loss calculation.

The $100 Rule and 10% AGI Floor

For personal theft losses (under Section 165(c)(3)), two reductions apply:

1. $100 rule: Each separate theft loss is reduced by $100.
2. 10% AGI floor: The total of all personal theft losses (after the $100 reduction) must exceed 10% of your adjusted gross income (AGI) to be deductible. Only the amount exceeding 10% of AGI is deductible.

For example, if your AGI is $100,000 and you have a $50,000 theft loss from FTX:

• Subtract $100: $49,900
• 10% of AGI: $10,000
• Deductible amount: $39,900

The 10% AGI floor means that taxpayers with high income relative to their loss may get little or no deduction. This is particularly challenging for investors who lost smaller amounts on exchanges.

Timing of Loss Recognition

A theft loss is generally deductible in the year you discover it. For most crypto exchange bankruptcies, the year of discovery is the year the exchange filed for bankruptcy or froze withdrawals:

• FTX: Discovered in November 2022 (2022 tax year)
• Celsius: Discovered in June-July 2022 (2022 tax year)
• Voyager: Discovered in July 2022 (2022 tax year)
• BlockFi: Discovered in November 2022 (2022 tax year)

However, the “discovery” rule has nuances. If you had reason to believe the exchange would eventually return your assets, the loss might not be considered “definitive” until a later year. The IRS has held that a theft loss is deductible in the year the loss becomes reasonably ascertainable — meaning you can determine the approximate loss with reasonable accuracy. For ongoing bankruptcy proceedings, this may be the year the bankruptcy plan is confirmed and you know how much (if anything) you will recover.

Filing Form 4684: Step-by-Step Instructions

Form 4684 (Casualties and Thefts) is the form used to report crypto exchange bankruptcy losses on your federal tax return. Here is a step-by-step guide to completing it.

Section A: Personal-Use Property

Most crypto exchange bankruptcy losses for individual investors will be reported in Section A (Personal-Use Property) of Form 4684.

Step 1 — Describe the property: Enter a description of the stolen property. For crypto losses, you would describe the cryptocurrency that was held on the exchange (e.g., “Bitcoin held on FTX exchange” or “Various cryptocurrencies held on Celsius”).

Step 2 — Enter dates: Enter the date the property was acquired and the date the theft was discovered. For FTX, the discovery date would be November 11, 2022 (the bankruptcy filing date) or the date you learned you could not withdraw your funds.

Step 3 — Calculate basis and FMV:

• Line 3: Enter your adjusted basis in the property (your original cost to acquire the crypto, including purchase fees)
• Line 4: Enter the fair market value of the property immediately before the theft
• Line 5: Enter the FMV immediately after the theft (for theft cases, this is generally $0)
• Line 6: The smaller of lines 3 or 4 (this is the amount of loss before adjustments)
• Line 7: Insurance or other reimbursement (enter amounts received or expected from bankruptcy recoveries, SIPC, or other sources)

Step 4 — Apply the $100 and 10% AGI rules:

• Line 8: Subtract line 7 from line 6 (if zero or less, enter -0-)
• Line 9: Enter $100
• Line 10: Subtract line 9 from line 8
• Line 11: Enter your AGI
• Line 12: Enter 10% of your AGI
• Line 13: Subtract line 12 from line 10 (if zero or less, you cannot deduct the loss)

Step 5 — Transfer to Schedule A: The result from line 14 of Form 4684 Section A transfers to Schedule A (Itemized Deductions) as a miscellaneous itemized deduction. Note that you must itemize your deductions to benefit from a personal theft loss — you cannot claim it if you take the standard deduction.

Section B: Business or Income-Producing Property

If you were engaged in a trade or business of trading cryptocurrency, or if the assets were held in a transaction entered into for profit (such as an investment activity), you may be able to report the loss under Section B instead. This can be advantageous because Section B losses are not subject to the $100 rule or the 10% AGI floor, and they can offset ordinary income.

However, the classification of crypto investing as a “trade or business” is a high bar. Most casual investors will not qualify as being in a trade or business. If you were a professional trader with significant activity, entity structure, and consistent operations, you might qualify. Otherwise, Section A is the appropriate form.

Important Filing Considerations

• Amended returns: If you did not claim a theft loss in the year of discovery, you can file an amended return (Form 1040-X) within three years of the original filing date or two years of paying the tax, whichever is later.
• Election to defer: In some cases, you can elect to defer the deduction to a later year if the loss is not yet definitive. This election must be made on a timely filed return.
• Multiple exchanges: If you had assets on multiple bankrupt exchanges, each loss is treated as a separate theft loss, each subject to the $100 reduction.

Tax Treatment of Recovered Assets

One of the most complex aspects of crypto exchange bankruptcy taxation is the treatment of recovered assets. When bankruptcy proceedings result in partial distributions to creditors, the tax consequences depend on several factors.

General Rule for Recoveries

If you claimed and deducted a theft loss in a prior year, and you later recover part of the stolen property, you must include the recovery in your gross income in the year you receive it — but only to the extent that the recovery gives you a tax benefit. This is known as the “tax benefit rule” under Section 111.

For example, if you claimed a $50,000 theft loss deduction that saved you $15,000 in taxes, and you later recover $30,000 worth of crypto, you must include the recovery in income — but only up to the $15,000 tax benefit you received. Any recovery exceeding the tax benefit is not included in income.

Cost Basis of Recovered Assets

When you receive cryptocurrency through a bankruptcy recovery, your cost basis in the recovered crypto is generally its fair market value on the date you receive it. This is because you are treated as having received income equal to the recovery (to the extent of the tax benefit), and the FMV becomes your basis for future capital gains calculations.

For FTX recoveries, many creditors received distributions in early 2024 and 2025. The FMV of the cryptocurrency at the time of distribution establishes the cost basis. If you received 0.5 BTC when BTC was trading at $60,000, your basis in that BTC is $30,000. Any subsequent appreciation or depreciation is tracked from that point forward.

What If You Did Not Claim a Loss?

If you could not claim a theft loss deduction (because of the TCJA suspension from 2018-2025) and you later receive recovered assets, you generally do not have taxable income from the recovery to the extent you never received a tax benefit. Since you could not deduct the loss during the suspension period, the recovery is not taxable under the tax benefit rule.

This means that FTX, Celsius, Voyager, and BlockFi users who discovered their losses between 2018 and 2025 and could not deduct them due to the TCJA suspension may receive recoveries without having to report them as income — to the extent they never received a deduction. However, this area is complex and the IRS has not issued specific guidance on this interaction.

Net Operating Loss Considerations

Large theft losses can sometimes create a net operating loss (NOL) — where your total deductions exceed your total income for the year. NOLs can be carried forward to offset income in future years. Under current law, NOLs can be carried forward indefinitely but are limited to offsetting 80% of taxable income in any future year.

If your crypto exchange bankruptcy loss creates an NOL, you can carry the loss forward to reduce taxes in profitable future years. This is particularly relevant for investors with large losses relative to their annual income.

State Tax Considerations

State tax treatment of crypto bankruptcy losses adds another layer of complexity. Each state has its own rules regarding conformity with federal tax law, and not all states allow the same deductions.

States That Conform to Federal Rules

Most states use federal adjusted gross income (AGI) as the starting point for calculating state taxable income. For itemized deductions, many states conform to the federal Schedule A. However, conformity varies:

• Full conformity states (e.g., California, New Jersey): These states generally follow federal rules for itemized deductions, meaning if you can deduct a theft loss federally, you can also deduct it at the state level. However, California has its own adjustments that may differ.
• Partial conformity states (e.g., New York, Illinois): These states may decouple from certain federal provisions or apply their own modifications to itemized deductions.
• No-income-tax states (e.g., Texas, Florida, Nevada, Washington): No state income tax means no state-level deduction is relevant.

States with No Theft Loss Deduction

Some states do not allow personal theft loss deductions at all, regardless of federal treatment. For example, Pennsylvania does not allow personal casualty or theft loss deductions. If you live in such a state, you can claim the deduction on your federal return but not on your state return.

State-Specific Considerations for 2026

With the TCJA expiration in 2026, states that conform to the federal treatment of itemized deductions will automatically restore the theft loss deduction. However, states that have permanently decoupled from the TCJA provisions may have different rules. Always check your state’s specific tax code or consult a state tax professional.

Record-Keeping Requirements

Proper documentation is absolutely essential for claiming crypto bankruptcy losses and reporting recoveries. The IRS requires substantiation for all claimed deductions, and the complexity of crypto transactions makes thorough record-keeping even more critical.

Essential Documents to Retain

1. Exchange account statements: Monthly or quarterly statements from the bankrupt exchange showing your holdings and transaction history. Download these before the exchange’s website goes offline — many exchanges’ customer portals have been shut down during bankruptcy proceedings.

2. Transaction records: Records of all deposits and withdrawals between your personal wallets and the exchange, including blockchain transaction hashes, dates, and amounts.

3. Purchase receipts: Documentation showing your original cost to acquire the cryptocurrency, including exchange purchase records, OTC trade confirmations, or on-chain purchase records.

4. Bankruptcy court documents: Copies of your filed proof of claim, the bankruptcy petition, the confirmed reorganization plan, and any court orders regarding asset distributions. These are available through PACER (Public Access to Court Electronic Records) or the bankruptcy court’s website.

5. Distribution records: When you receive recovered assets, keep records of the distribution date, amount, asset type, and FMV at the time of receipt.

6. Correspondence: Keep copies of all communications from the bankruptcy trustee, claims agent, or exchange regarding your account, claim status, and distributions.

7. Form 1099-DA: Starting in 2026, exchanges are required to issue Form 1099-DA for digital asset transactions. If the bankrupt exchange or the bankruptcy trustee issues you a 1099-DA, retain it for your records.

How Long to Keep Records

The IRS generally has three years to audit a tax return, but this period extends to six years if you omit more than 25% of your gross income. For theft loss claims, retain all supporting documentation for at least seven years after the loss is claimed — and longer if you are still receiving distributions from the bankruptcy estate. Since some bankruptcy proceedings have lasted several years, you may need to maintain records across multiple tax years.

Using Crypto Tax Software

Specialized crypto tax software can help you track and document your losses by importing transaction history from exchanges and generating detailed reports. However, if the exchange has gone bankrupt and its API is no longer functional, you may need to manually import your transaction data from downloaded CSV files or blockchain records. Ensure that your software can handle the complexity of theft loss reporting and bankruptcy distributions.

Step-by-Step Filing Guide for 2026

Here is a comprehensive step-by-step guide to filing your taxes if you have crypto exchange bankruptcy losses or recoveries in the 2026 tax year.

Step 1: Determine Your Eligibility

Confirm that your loss qualifies as a theft loss under Section 165(c)(3). The loss must result from a criminal act (fraud, embezzlement, or similar), not merely from poor investment performance or market declines. Gather evidence of the criminal nature of the loss, such as criminal indictments, convictions, or SEC enforcement actions related to the exchange.

Step 2: Calculate Your Loss Amount

Determine your adjusted basis in the stolen assets. Add up all original purchase costs (including exchange fees) for the cryptocurrency that was held on the bankrupt exchange. If you have multiple types of crypto on the exchange, calculate the basis for each separately and combine them.

Step 3: Account for Recoveries

If you have already received partial recoveries from the bankruptcy proceedings, subtract the recovered amount from your total loss. If you expect future recoveries, you may need to adjust your loss claim accordingly or plan for future income inclusion when recoveries arrive.

Step 4: Complete Form 4684

Fill out Form 4684 Section A (for personal losses) or Section B (for business losses). Enter the description of property, dates, basis, FMV, and apply the $100 rule and 10% AGI floor for personal losses.

Step 5: Transfer to Schedule A

If filing under Section A, transfer the deductible amount to Schedule A (Itemized Deductions). Ensure that your total itemized deductions exceed your standard deduction — otherwise, the theft loss provides no tax benefit.

Step 6: Report Recoveries as Income

If you claimed a theft loss deduction in a prior year and are receiving recoveries in 2026, report the recovery as “Other Income” on Schedule 1, but only up to the amount of the tax benefit you received from the original deduction.

Step 7: File State Returns

Complete your state tax return, applying state-specific rules for theft loss deductions. If your state does not conform to federal rules, you may need to make adjustments on your state return.

Step 8: Retain All Documentation

Keep all supporting documents, including Form 4684 calculations, exchange statements, bankruptcy court filings, and distribution records, for at least seven years.

Related Guides

• Crypto Theft and Scam Loss Tax Deduction 2026 — Learn how to claim deductions for crypto stolen through scams and fraud
• Crypto Loss Harvesting Strategies — How to offset gains with strategic crypto losses
• IRS Crypto Audit Triggers — Understand what draws IRS attention to your crypto tax return
• Crypto Tax Record Reconciliation: 1099-DA 2026 — How to reconcile exchange reporting with your records

FAQ

Can I claim a theft loss for crypto stuck on FTX if I never withdrew my original deposit?

Yes, if you deposited cryptocurrency or fiat currency onto FTX and could not withdraw it due to the bankruptcy, you can claim a theft loss. Your deductible loss is based on your adjusted basis (original purchase cost) in the assets, not their market value at the time of the FTX collapse. For example, if you bought 2 BTC for $20,000 total and deposited them on FTX, your theft loss basis is $20,000 — even if BTC was worth $60,000 when FTX collapsed. The IRS uses the lesser of your basis or the decline in FMV, which for theft cases where the property is entirely lost, is your full basis.

How are FTX bankruptcy distributions taxed if I receive them in 2026?

FTX distributions are taxed based on whether you previously claimed a theft loss deduction. If you claimed and benefited from a theft loss deduction for your FTX loss, the recovery is taxable under the tax benefit rule — meaning you report it as income to the extent the prior deduction reduced your tax. If you could not claim a deduction (due to the TCJA suspension for losses discovered 2018-2025), the recovery may not be taxable since you received no tax benefit. Your cost basis in the recovered crypto is its FMV on the distribution date. Keep detailed records of all FTX distribution payments for both your 2026 tax filing and future capital gains tracking.

Does the 10% AGI floor apply to crypto exchange bankruptcy theft losses?

Yes, for personal theft losses reported under Section 165(c)(3), the 10% AGI floor applies. Each theft loss is first reduced by $100, and then the total must exceed 10% of your adjusted gross income. Only the excess above 10% of AGI is deductible. For example, if your AGI is $200,000 and your FTX loss is $50,000, your deductible loss after both reductions would be $29,900 ($50,000 - $100 - $20,000). If your crypto exchange bankruptcy loss is your only large deduction and your AGI is high, the 10% floor can significantly limit the tax benefit. Business losses reported under Section 165(c)(1) or (c)(2) are not subject to these limitations.

What is the difference between a crypto bankruptcy theft loss and a capital loss?

A theft loss from a crypto exchange bankruptcy is reported on Form 4684 and deducted as an itemized deduction (for personal losses) or against ordinary income (for business losses). A capital loss, by contrast, results from selling or exchanging cryptocurrency for less than your cost basis. Capital losses are reported on Form 8949 and Schedule D, and they can only offset capital gains (plus up to $3,000 of ordinary income per year). Theft losses have the advantage of being deductible against ordinary income (subject to the AGI floor for personal losses), which can be more valuable than capital loss treatment. However, you cannot claim both a theft loss and a capital loss for the same assets — you must choose the appropriate treatment based on the circumstances.

Can I amend a prior year return to claim a crypto theft loss I missed?

Yes, you can file Form 1040-X to amend a previously filed return and claim a theft loss deduction, as long as you are within the statute of limitations. Generally, you have three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. For crypto exchange bankruptcies that occurred in 2022, you would need to file the amended return by the applicable deadline. However, remember that for tax years 2018 through 2025, personal theft losses that are not attributable to a federally declared disaster are not deductible due to the TCJA suspension. This means you generally cannot claim a personal crypto theft loss on an amended return for those years.

How do I report recovered crypto from a bankruptcy if I never claimed a loss?

If you never claimed a theft loss deduction — either because you were prevented by the TCJA suspension or you simply chose not to — receiving recovered crypto from a bankruptcy proceeding generally does not create taxable income under the tax benefit rule. The reasoning is that since you never received a tax benefit from deducting the loss, the recovery does not need to be included in income. However, your cost basis in the recovered cryptocurrency is your original basis (what you paid to acquire it), not the FMV at the time of recovery. This means if you later sell the recovered crypto, your capital gain or loss is calculated from your original purchase price, which could result in a significant taxable gain if the crypto has appreciated substantially since you originally bought it.

Are crypto losses from a hacked exchange treated differently than losses from a fraudulent exchange?

The distinction between a hack and fraud can affect how the loss is classified. If an exchange was hacked by external actors (like the 2016 Bitfinex hack or 2014 Mt. Gox hack), the loss may qualify as a theft loss since theft involves the unlawful taking of property. If the exchange operators themselves committed fraud by misappropriating customer funds (like FTX), this also qualifies as a theft loss. The key requirement is that the loss arises from an illegal act — whether committed by insiders or external hackers. If an exchange simply failed due to poor management without any criminal element, the loss would not qualify as a theft loss under Section 165(c)(3), though it might qualify under other provisions as an investment loss or bad debt.

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