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Crypto Law/Level IX · Death, divorce and disputes/9.2 Family and money disputes/Lesson 7

Lost or stolen: insurance and police reports

Why ordinary home insurance rarely pays for stolen crypto, what specialised cover does and does not include, why a police report matters even when recovery is unlikely, and how US tax treats the loss.

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. Report at once to the FBI’s IC3 and local police, or to Report Fraud in England, Wales and Northern Ireland; a report reference supports insurance, exchange freeze requests and tax claims.
  2. Read your own policy before assuming no cover: Sedaghatpour v. Lemonade found no physical loss but the insurer paid its $500 electronic access-device cover; homeowners policies often require police notice after theft.
  3. Profit-motivated scam losses may be deductible under §165(c)(2), as IRS memo 202511015 applied; purely personal theft losses are deductible only for declared disasters under §165(h)(5).
  4. Ponzi-scheme victims can use Rev. Proc. 2009-20: deduct 95% of the net investment, or 75% if pursuing third-party recovery, in the discovery year, once the lead figure is criminally charged; attach the signed Appendix A statement.
  5. A lost hardware wallet costs nothing if the recovery phrase is safe: restore on a new device; never pay upfront fees to recovery services promising to get coins back.

MaterialsYour home or renter’s insurance policy, especially its definitions, special limits and ‘duties after loss’ conditionsTransaction hashes, addresses, dates, times and amounts for any lossThe reporting service for your country (in the US, the FBI’s IC3; in England, Wales and Northern Ireland, Report Fraud)

Wonder

  1. Does home insurance cover crypto stolen from my wallet?
  2. Is it worth reporting a theft to the police if they are unlikely to get it back?
  3. Can stolen or lost crypto be deducted for tax?

Explore

  1. Standard home insurance was written for physical things, and courts read it that way. In Sedaghatpour v. Lemonade Insurance Co., No. 23-1237, the Fourth Circuit on 24 October 2024 affirmed the dismissal of a homeowner’s claim for cryptocurrency stolen from a hot wallet. The policy covered ‘direct physical loss’ of personal property, and applying Virginia law the court held that the digital theft of digital currency is not a direct physical loss. The insurer had already paid the $500 the policy offered for theft or unauthorised use of an electronic fund transfer card or access device, so nothing more was owed. The opinion is unpublished and not binding precedent.
  2. Policy wording explains such results. The widely used ISO homeowners special form, HO 00 03 (1991 edition), sets special limits such as $200 for money, bank notes, bullion and coins, and $1,000 for securities, accounts and evidences of debt; it was not drafted with crypto in mind. Insurers use their own versions and endorsements, so the answer for any household lies in its own policy’s definitions, exclusions and limits. Losing a hardware wallet device is different from losing the coins: if the recovery phrase is safe, the coins can be restored on a new device, because they never left the blockchain (lesson 4.1.5).
  3. Specialist crime and specie insurance is bought mainly by exchanges and custodians. The US National Association of Insurance Commissioners warns that such cover is far from comprehensive, and that it does not protect individual accounts from loss through unauthorised access caused by a breach or lost credentials. A platform’s statement that it is ‘insured’ therefore usually concerns the platform’s own losses, such as a hack of its hot wallet, rather than a customer whose password was phished. Crypto is not a bank deposit, so FDIC deposit insurance does not apply to it (lesson 4.1.1). A few insurers offer cover to individuals, and its exclusions decide what it is worth.
  4. A police report matters even when recovery is unlikely. The ISO HO 00 03 form lists among the insured’s duties after a loss the duty to notify the police in case of loss by theft, and other organisations handling a claim or complaint may ask for a report reference. Reports also feed investigations that sometimes lead to freezes, seizures and the return of funds (lesson 4.2.7). In the US, crypto theft and fraud are reported to the FBI’s Internet Crime Complaint Center (IC3), often alongside local police. In England, Wales and Northern Ireland, Report Fraud replaced Action Fraud as the national reporting service on 4 December 2025.
  5. US tax treatment depends on why the coins were lost. Under 26 U.S.C. §165(c)(3), an individual’s theft losses of personal property are deductible only within the limits of §165(h), and §165(h)(5)(A) now allows personal casualty and theft losses only to the extent attributable to a federally declared or state declared disaster. Losses in a transaction entered into for profit fall under §165(c)(2) instead, and IRS Chief Counsel memorandum 202511015 applied that rule to some scam victims who had transferred funds expecting a profit (lesson 4.2.1). Coins that are merely inaccessible because a key was lost raise different questions, because nothing was stolen.
  6. Speed and records help on every route. The useful record after a theft is the transaction hashes, the addresses involved, amounts, dates and times, screenshots of any messages, and the exchange or wallet used. The same record supports a police report, a freeze request to an exchange that received the funds, an insurance claim and a tax return. Anyone who promises recovery in exchange for an upfront fee should be treated with great caution (lesson 4.2.5). A practical check now, before any loss: read the home policy’s special limits and theft conditions, list where each holding sits, and note which reporting channel applies where you live.

Key facts

  • In Sedaghatpour v. Lemonade Insurance Co., No. 23-1237, decided on 24 October 2024, the Fourth Circuit held that the digital theft of digital currency is not a ‘direct physical loss’.
  • In Sedaghatpour, the insurer’s payment of $500 under the policy’s electronic fund transfer card or access device coverage satisfied its obligation.
  • The ISO homeowners special form HO 00 03 (1991 edition) sets a $200 special limit for money, bank notes, bullion and coins.
  • The ISO HO 00 03 form requires the insured to notify the police in case of loss by theft.
  • Under 26 U.S.C. §165(h)(5)(A), an individual’s personal casualty and theft losses are deductible only to the extent attributable to a federally or state declared disaster.
  • Report Fraud replaced Action Fraud as the UK national service for reporting fraud and cyber crime on 4 December 2025.

Exercise nine, six, three, one

9CollectList up to 9 ways crypto you hold or know of could be lost or stolen, such as a phished password, a lost hardware wallet, a drained wallet approval or a failed platform.
6ClusterSort them into 6 groups: theft from an exchange account, theft from self-custody, scam with consent, lost key, lost device with phrase intact, and platform failure.
3DistillReduce the 6 to 3 by keeping the groups where neither insurance nor a tax deduction would be likely to help.
1CrystallizeWrite 1 sentence stating what record you would need to have ready for each of those 3 groups if the loss happened tomorrow.

Fact check

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

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