MSTR Cat

Crypto Law/Level II · Tax: the first trap/2.3 Records and reporting/Lesson 3

Losses, worthless tokens and the wash-sale question

How US tax lets crypto losses count, why a collapsed token usually gives no deduction until it leaves your hands, and where the wash-sale rule stands.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Realise a loss by selling to another party, even for a small price: a closed sale creates a capital loss, while holding a collapsed token gives none under the IRS view in CCA 202302011.
  2. Net capital losses offset gains and up to $3,000 of other income a year ($1,500 married filing separately) under section 1211(b), with the rest carried forward until used under section 1212(b).
  3. As of October 2026 the section 1091 wash-sale rule covers stock or securities, not crypto by its terms, so a quick repurchase after a loss sale is not barred by statute; the sale must be genuine, and Congress may change this.
  4. Abandonment rarely helps: Pub. L. 119-21 made the suspension of miscellaneous itemized deductions permanent, so an abandonment loss on an investment token is generally not deductible; a documented sale is the lawful route.

MaterialsIRS Chief Counsel Advice 202302011 (January 2023) on cryptocurrency that has declined in value26 U.S.C. §1211(b) and §1091 on law.cornell.eduA list of tokens you hold that trade far below what you paid, with the wallet or account where each sits

Wonder

  1. If a token I own falls 99%, can I deduct the loss without selling it?
  2. How much of a crypto loss can reduce my other income in one year?
  3. Can I sell at a loss and buy the same coin back the next day?

Explore

  1. In US federal tax a loss counts only when it is realized, meaning fixed by a sale, swap or other closed transaction. A coin that has fallen in price but is still held is an unrealized loss, and it does not appear on the return. Once realized, capital losses first offset capital gains of the same year, short-term against short-term and long-term against long-term, then against each other (lesson 2.3.2). Under 26 U.S.C. §1211(b), an individual with net capital losses can deduct only $3,000 of them against other income per year, or $1,500 if married filing separately. The rest carries forward to later years under §1212(b).
  2. Worthless tokens are the hard case. In Chief Counsel Advice 202302011, issued in January 2023, the IRS considered a holder whose token fell from $1.00 to under one cent but still traded on at least one exchange. Its answer was no deduction: the token was not worthless because it still had some value, and it had not been abandoned. Chief Counsel Advice is not precedent, but it shows the IRS position. The memo relied on the long-standing rule that a mere drop in value is not a deductible loss without an identifiable event, such as a sale, exchange or abandonment.
  3. The memo added a second barrier. The special rule in §165(g), which treats a worthless security as sold on the last day of the year, covers stock, rights to stock and certain debt instruments; a typical cryptocurrency is none of these. So a loss from worthlessness or abandonment would fall under general §165(a), which for individuals is a miscellaneous itemized deduction. Section 67 suspended those deductions starting in 2018. The memo described the suspension as running through 2025, but Pub. L. 119-21, enacted in July 2025, made it permanent. As of October 2026, an individual’s abandonment loss on an investment token is generally not deductible at all.
  4. By contrast, a sale to another party, even for a tiny price, is a closed transaction that produces a capital loss subject to the normal limits. That is why records of the final disposal of a dead token matter as much as records of its purchase (lesson 2.3.7). Thefts, hacks and scams raise different questions under the casualty and theft loss rules of §165, which are narrower for personal losses and are not covered here. Tokens that are securities under the tests in Level 3 may be treated differently, so the label matters (lesson 1.2.7).
  5. The wash-sale rule in 26 U.S.C. §1091 disallows a loss on a sale of stock or securities when substantially identical stock or securities are bought within 30 days before or after the sale. By its text it applies to stock or securities, while IRS guidance since Notice 2014-21 treats virtual currency as property without calling it a stock or security. As of October 2026, §1091 has not been amended to cover digital assets. Proposals to change that exist: the Treasury’s General Explanations of the administration’s fiscal year 2025 revenue proposals, published in March 2024, would have applied the wash-sale rules to digital assets. Such proposals have not been enacted, and Congress could revisit them.
  6. A practical check: list every token you hold below cost and note, for each, whether it still trades anywhere and whether you could document a sale if one happened. Then total your realized capital gains and losses so far this year and any carryforward from last year’s Schedule D. This lesson explains the rules; it does not recommend selling, repurchasing or harvesting losses. Selling and buying back quickly has trading costs and market risk, and the wider strategy and its traps belong to lesson 7.1.2. A qualified tax adviser can review whether a particular loss is allowable.

Key facts

  • Under 26 U.S.C. §1211(b), an individual’s net capital losses can offset only $3,000 of other income per year, or $1,500 if married filing separately.
  • Capital losses an individual cannot use in one year carry forward to later years under 26 U.S.C. §1212(b).
  • In CCA 202302011 (January 2023), the IRS concluded that a token that fell below one cent but still traded was neither worthless nor abandoned, so no loss was allowed.
  • Section 165(g), the worthless-securities rule, covers stock, stock rights and certain debt instruments, which the IRS memo said a typical cryptocurrency is not.
  • Pub. L. 119-21 (2025) made permanent the suspension in 26 U.S.C. §67 of miscellaneous itemized deductions for tax years beginning after 31 December 2017.
  • As of October 2026, the wash-sale rule in 26 U.S.C. §1091 by its terms covers stock or securities and has not been extended to digital assets by statute.

Exercise nine, six, three, one

9CollectList up to 9 crypto positions you hold or have studied that are worth less than their cost, noting the cost, today’s value and whether the token still trades anywhere.
6ClusterSort them into 6 categories: still actively traded, thinly traded, no longer traded anywhere, possibly a security, lost through theft or a scam, and status unknown.
3DistillReduce the 6 categories to 3 groups: losses that could be realized by an ordinary sale, losses the IRS position would likely not allow without a sale, and cases needing a qualified adviser.
1CrystallizeWrite 1 sentence explaining, in your own words, why a token that has fallen 99% usually produces no tax loss while you still hold it.

Fact check

Dates, figures and claims checked against the published sources listed below.

Open in the interactive academy →

PT ES ZH JA KO RU DE FR MS