January 2023 Foodman Website and JD Supra

Given that we are in full swing of tax season, many taxpayers are exploring the possibility of claiming a crypto tax deduction over their “devalued” crypto assets.  Taxpayers ought to refer to the IRS Chief Counsel Advice Memorandum Number: 202302011 dated 1/13/2023 for clarity.  The Memorandum responds to non-taxpayer specific advice regarding the applicability of section 165 of the Internal Revenue Code.  Of note, the Memorandum states that the document should not be used or cited as precedent.

What is the Issue at hand?

Section 165 of the Internal Revenue Code provides for the deduction of losses sustained during the taxable year (not compensated for by insurance or otherwise).   If a Taxpayer owns cryptocurrency that has substantially declined in value, has Taxpayer A sustained a loss under section 165 of the Code due to worthlessness or abandonment of the cryptocurrency?

Short answer is No

The Memorandum states that Section 165 provides a deduction for losses that are evidenced by:

  • closed and completed transactions
  • fixed by identifiable events,
  • actually, sustained during the taxable year


The Memorandum states that  Taxpayer with the issue at hand noted above (cryptocurrency that has substantially declined in value) has not abandoned or otherwise disposed of the cryptocurrency, and the cryptocurrency is not worthless because it still has value. Consequently, a Taxpayer has not sustained a loss under section 165 and the corresponding regulations. In addition, even if a Taxpayer sustained a loss under section 165, the loss would be disallowed because section 67(g) suspends miscellaneous itemized deductions for taxable years 2018 through 2025.

Highlights of the discussion in the Memorandum

  • Sales, exchanges, and other dispositions of digital assets may result in recognition of gain or loss.
  • The character of a gain or loss resulting from a disposition of a cryptocurrency generally depends on whether the property is a capital asset in the hands of the taxpayer.
  • A taxpayer not in the trade or business of dealing in cryptocurrency will generally realize capital gain or loss on the sale or exchange of a cryptocurrency.
  • A taxpayer realizes ordinary gain or loss on the sale or exchange of property that is not held as a capital asset.
  • Section 165(g) provides that if any security which is a capital asset becomes worthless during the taxable year, the loss shall be treated as a loss from the sale or exchange of a capital asset.
  • Section 165(g)(2) defines a security as a share of stock in a corporation; a right to subscribe for, or to receive, a share of stock in a corporation; or a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form. Cryptocurrency is none of the items listed in section 165(g)(2), and therefore section 165(g) does not apply.
  • For individual taxpayers, section 67(b)(3) characterizes section 165(a) losses, other than those from casualty, theft, and wagering, as miscellaneous itemized deductions.  Under current law, section 67(g) disallows all miscellaneous itemized deductions for tax years beginning after December 31, 2017, and before January 1, 2026.

Clarity on Worthless Cryptocurrency

For Cryptocurrency that has substantially decreased in value; however, its value was greater than zero, it continued to be traded on at least one cryptocurrency exchange, and a Taxpayer did not sell, exchange, or otherwise dispose of the units of Cryptocurrency:  “The mere diminution in value of property does not create a deductible loss. An economic loss in value of property must be determined by the permanent closing of a transaction with respect to the property. A decrease in value must be accompanied by some affirmative step that fixes the amount of the loss, such as abandonment, sale, or exchange.”  Meaning:  in a case whereby each unit of Cryptocurrency had liquidating value, though it was valued at less than one cent at the end of 2022,  Cryptocurrency continued to be traded on at least one cryptocurrency exchange, allowing for the possibility that it may increase in value in the future. Accordingly, Cryptocurrency was not wholly worthless during 2022 as a result of its decline in value, and a Taxpayer will not sustain a bona fide loss under section 165(a) in 2022 due to worthlessness.

Clarity on Abandoned Cryptocurrency

Abandonment is proven through an evaluation of the surrounding facts and circumstances, which must show: (1) an intention to abandon the property, coupled with (2) an affirmative act of abandonment.

Under Section 165, a taxpayer sustains a loss under section 165(a) for the obsolescence or loss of usefulness of non-depreciable property if:

  1. the loss is incurred in a business, or a transaction entered for profit;
  2. the loss arises from the sudden termination of usefulness in the business or transaction; and
  3. the property is permanently discarded from use, or the transaction is discontinued.

If a Taxpayer did not take any action to abandon and permanently discard Taxpayer units of Cryptocurrency  during 2022, then the taxpayer maintained ownership of Cryptocurrency through the end of 2022, even though the value of each unit of the cryptocurrency as of the end of the year was less than one cent. Hence, Taxpayer continued to exert dominion and control over Cryptocurrency and, regardless of intent, did not take any affirmative steps to abandon the property during 2022.  Consequently, Taxpayer did not sustain a loss pursuant to section 165(a) in 2022 due to abandonment.

Know this

Best to consult your Crypto Tax Advisor when filing 2022 Taxes to claim any crypto tax deductions.  ©