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No Loss Deduction for Decline in Crypto Values

Posted on Jan. 18, 2023

Cryptocurrency that continues to trade on an exchange — even if just for a fraction of a penny per unit — isn’t worthless for purposes of triggering a deductible loss, the IRS advised.

In non-taxpayer-specific advice (ILM 202302011) released January 13, the IRS advised that a taxpayer who continues to hold cryptocurrency despite a significant decline in its value, and has taken no steps to abandon it, hasn’t suffered a loss for which a deduction can be claimed under section 165.

The January 10 chief counsel advice memorandum puts taxpayers on notice, ahead of the 2022 tax year filing season that begins January 23, that the agency’s current legal position is to deny deductions for diminutions in cryptocurrency value that don’t reduce that value to zero.

The memo specifies that each unit of the cryptocurrency theoretically at issue “had liquidating value, though it was valued at less than one cent at the end of 2022,” having been purchased earlier in the year for $1 per unit. The cryptocurrency “continued to be traded on at least one cryptocurrency exchange, allowing for the possibility that it may increase in value in the future,” and the taxpayer continued to own it and hadn’t taken any steps to abandon or permanently dispose of it.

As a result, the cryptocurrency was neither worthless nor abandoned for purposes of a loss deduction under section 165, the memo concluded.

Nonbinding Advice

Chief counsel advice memos provide a window into the thinking of the IRS, but the advice they contain isn’t binding on the agency and is subject to change without notice, according to the Internal Revenue Manual.

“This type of legal advice does not set out official rulings or positions of the Service and may not be referenced in other documents as precedent,” the IRM states. “A subsequent decision to adopt a different position on the same or a similar issue will, therefore, not require the withdrawal or revocation of” a chief counsel advice memo.

The IRM provides that non-taxpayer-specific legal advice can be issued in response to a request from a field office or a division within the IRS. The memo released January 13 was addressed to area counsel within the Small Business/Self-Employed Division.


The IRS can choose its fact pattern for non-taxpayer-specific advice, Miles Fuller of TaxBit told Tax Notes, and in this memo it crafted the facts to support a simple outcome: The taxpayer still owns the crypto and it still has some value, so there is no disposition event.

In practice, though, taxpayers will have to contend with issues not covered in that simpler analysis, Fuller said. There is no indication of what would render a unit of cryptocurrency worthless, for example, or guidance on what happens when a blockchain network goes offline — as the Terra LUNA network did in May 2022.

Joshua D. Smeltzer of Gray Reed & McGraw LLP pointed out that even if a cryptocurrency is listed on an exchange, that doesn’t mean there are any willing buyers for it. If a taxpayer can show unsuccessful attempts to sell the cryptocurrency over a period of time, those facts should be relevant to whether the cryptocurrency is worthless, he said.

There are numerous exchanges for digital assets, with cryptocurrencies listed because they once traded at $1 per unit, even though they no longer do. “Some cryptocurrency could conceivably exist forever, without any sort of value or any way to market it,” Smeltzer explained, adding that for the main cryptocurrencies that are traded, that’s probably not an issue.

The lack of willing buyers could affect the valuation of the cryptocurrency and any losses suffered on it, according to Smeltzer. “People take discounts all the time for lack of marketability or an inability to know [the value] because the market is so small,” he said.


The IRS’s fact pattern in the memo stipulates that the taxpayer didn’t take any action to abandon or permanently discard the cryptocurrency at issue. But it doesn’t address what actions — if any — would qualify as abandonment, Fuller said.

The memo lacks any discussion of whether there is something a taxpayer could do to abandon cryptocurrency, which Fuller interpreted to mean the IRS was “trying to imply there’s really not.”

A few protocols and websites have appeared over the last few months that hold themselves out as places to abandon cryptocurrency, Fuller said, but he warned that those transactions can be interpreted as transfers and not as abandonment. Under that interpretation, he said, it “really can’t be abandonment; it’s more of a disposition or a transfer or a trade, even if [the taxpayer gets] $0 in return.”

Fuller said the memo “raises this threshold issue: Is it really ever possible that you could abandon crypto?”

Suspended Deduction

The memo notes that even if an individual taxpayer suffered a section 165 loss on the cryptocurrency’s decline in value during 2022, that loss deduction would be disallowed.

Section 67(g), added to the code in 2017 as part of the Tax Cuts and Jobs Act, disallows miscellaneous itemized deductions for the tax years 2018 through 2025. The chief counsel memo’s fact pattern describes an individual taxpayer who purchased cryptocurrency for personal investment purposes, and in the absence of section 67(g), losses on those investments could be deductible under section 165.

Code Sections
Subject Areas / Tax Topics
Magazine Citation
Tax Notes Federal, Jan. 23, 2023, p. 586
178 Tax Notes Federal 586 (Jan. 23, 2023)
Institutional Authors
Tax Analysts
Tax Analysts Document Number
DOC 2023-1429
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