NFTs lost to theft, hacks, or scams may be deductible as casualty losses under IRC Section 165.

But the IRS has strict documentation requirements, and not all losses qualify.

What Qualifies as Theft

Phishing attacks: Someone tricked you into signing a malicious transaction that drained your wallet.

Smart contract exploits: A protocol got hacked and your NFTs were stolen.

Wallet compromise: Your private key was stolen and someone transferred your NFTs out.

Rug pulls: The project team abandoned the project and took your mint funds (harder to prove as theft vs. bad investment).

What Doesn’t Qualify

Market value drop: You bought an NFT for 10 ETH and it’s now worth 1 ETH. That’s a capital loss (when you sell), not a theft loss.

Failed project: The team stopped developing but didn’t steal anything. This is a capital loss when you sell for $0.

Selling to a scammer: You listed your NFT and accepted a bid from someone who paid in fake WETH. That’s a sale (possibly for $0), not theft.

When to Claim the Loss

Theft losses are deductible in the year the theft occurred—or the year you discovered it.

Your wallet was drained on March 15, 2024. You can claim the loss on your 2024 tax return.

If you didn’t realize your NFT was stolen until you checked your wallet in January 2025 (but the blockchain shows it was stolen in December 2024), the loss still belongs on your 2024 return.

Calculating Your Deductible Loss

Your loss equals the adjusted basis of the stolen NFT, reduced by any insurance or reimbursement.

You bought a Bored Ape for $150,000. It was stolen via phishing. You received no reimbursement.

Deductible loss: $150,000 (your cost basis).

Note: You deduct basis, not current market value. If the Ape was worth $200,000 when stolen, you can’t deduct the $200,000 market value—only your $150,000 basis.

If you received $50,000 from an insurance claim or protocol reimbursement:

Deductible loss: $100,000 ($150,000 basis - $50,000 recovered).

The $100 and 10% Limitations

For personal property theft (which includes NFTs for most taxpayers), your deductible loss is reduced by:

  1. $100 per casualty event
  2. 10% of your AGI (adjusted gross income)

Example: Your AGI is $200,000. You lost a $150,000 NFT to theft.

  • Theft loss: $150,000
  • Minus $100: $149,900
  • Minus 10% of AGI ($20,000): $129,900 deductible

If your AGI is $300,000, the deduction drops to $119,900 ($150,000 - $100 - $30,000).

These limitations make small theft losses (<$30,000) almost worthless for deduction purposes if you have high income.

Documentation You Need

To claim a theft loss, the IRS wants proof:

  1. Blockchain evidence showing the theft (transaction hash of unauthorized transfer)
  2. Police report (file a report with local law enforcement, even if they can’t help)
  3. Proof of ownership (Etherscan showing the NFT in your wallet before theft)
  4. Proof of cost basis (original purchase transaction)
  5. Proof you didn’t receive reimbursement (no insurance payout, no protocol compensation)

Without a police report, the IRS will likely disallow the deduction. Even though it feels pointless to report a crypto theft to local police, you need that report number for your tax filing.

Rug Pulls Are Harder to Prove

If a project abandoned development and your NFT is now worthless, that’s not theft—it’s a loss in value.

You can only claim a casualty loss if the team actually stole funds (provable fraud).

Otherwise, you wait until you dispose of the NFT (sell it for $0.0001 or abandon it) and claim a capital loss.

Where to Report It

Theft losses go on Form 4684 (Casualties and Thefts), then flow to Schedule A as an itemized deduction.

Important: You can only claim it if you itemize deductions. If you take the standard deduction ($13,850 single / $27,700 married), the theft loss provides no benefit unless it’s large enough to exceed the standard deduction when combined with other itemized deductions.

Action Step

If you lost NFTs to theft this year:

  1. File a police report immediately (required for IRS documentation)
  2. Save the Etherscan transaction showing unauthorized transfer
  3. Calculate your basis in the stolen assets
  4. Check if itemizing makes sense given the 10% AGI limitation

If your theft loss is $20,000 but your AGI is $250,000, your deduction (after reductions) might be near $0. In that case, it’s not worth the hassle.

But if you lost $200,000 in NFTs to a hack, the deduction (even after AGI reduction) could save you $30,000-$50,000 in taxes. File the police report and document everything.

Theft losses are real tax deductions—but only if you can prove the theft occurred and meet all IRS requirements.