Digital asset investors often ask whether they can deduct losses when a token becomes “dead,” nearly worthless, frozen on an exchange, or impossible to sell. The short answer is: not every economic loss is immediately deductible for tax purposes. Digital assets are generally treated as property, not currency, for U.S. federal income tax purposes, so general property tax principles apply to digital asset transactions.
For tax purposes, a digital asset includes a digital representation of value recorded on a cryptographically secured distributed ledger or similar technology, including cryptocurrencies, stablecoins, and NFTs.
The key issue is whether you have had a closed and completed transaction, fixed by an identifiable event, and actually sustained during the taxable year.
Core Rule: A Decline in Value Is Not Enough
A token becoming nearly worthless is not automatically a deductible tax loss. A loss deduction generally requires a loss actually sustained during the taxable year and not compensated by insurance or otherwise.
Treasury regulations provide that deductible losses must be evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the taxable year.
This matters because an asset can fall dramatically in value without producing a current tax deduction. The IRS Chief Counsel addressed a similar cryptocurrency fact pattern and concluded that a taxpayer who still owned cryptocurrency that continued to trade, even at a value of less than one cent, had not sustained a deductible loss merely because the token had substantially declined in value. See IRS Chief Counsel Memorandum 202302011.
For crypto investors with dead or nearly worthless tokens, following are some options to consider:
Option 1: Sell the Token on an Exchange
The cleanest tax result usually comes from an actual sale. If you sell a digital asset held as a capital asset, you generally recognize capital gain or loss.
Your gain or loss generally equals the difference between your adjusted basis in the digital asset and the amount realized on the sale, reported in U.S. dollars.
If you held the token for one year or less, the gain or loss is generally short-term; if you held it for more than one year, it is generally long-term.
Option 2: Exchange the Token for Another Digital Asset
An exchange of one digital asset for another is also generally a taxable disposition. If you exchange digital assets for other property, including other digital assets that differ materially in kind or extent, you generally recognize capital gain or loss.
The gain or loss is generally measured by comparing your adjusted basis in the digital asset transferred with your amount realized on the exchange.
This may be a practical option if the token still has some market or swap value, even if that value is very small.
Option 3: Use the Token to Buy Goods or Services
Using a digital asset to pay for goods or services is generally treated as a disposition of the digital asset. If you pay for services using digital assets, you have disposed of the digital assets in exchange for the services and may have capital gain or loss on that disposition.
The IRS also states that taxpayers should answer “Yes” to the digital asset question if they disposed, sold, exchanged, or transferred ownership of digital assets in exchange for property, goods, or services.
Option 4: Wait Until the Token Becomes Completely Worthless
A token that is merely “down 99%” is not necessarily worthless. The IRS Chief Counsel stated that cryptocurrency that still had value and continued to trade on at least one exchange was not wholly worthless, even though its value had declined to less than one cent.
A loss may be sustained if an asset becomes truly worthless, but worthlessness is fact-specific.
For individual investors, even if a digital asset investment becomes worthless or is abandoned, the Taxpayer Advocate Service states that the ordinary loss may be treated as a miscellaneous itemized deduction and is not deductible for tax years 2018 through 2025 because miscellaneous itemized deductions are disallowed during that period.
Option 5: Frozen Accounts and Bankruptcy Situations
If your tokens are frozen on a platform or tied up in bankruptcy proceedings, you may not yet have a deductible loss because there may not be a closed and completed transaction.
The Taxpayer Advocate Service explains that if you later receive a bankruptcy settlement in exchange for your digital assets, that settlement may be treated as a sale, and you should calculate any capital gain or loss in the year you receive the settlement.
If you receive nothing from a bankruptcy settlement, neither money nor your digital assets, the investment may be considered worthless, but the rules for worthless or abandoned digital asset investments should be considered separately. You may be able to claim an investment capital loss deduction in some cases. Consult your tax advisor for guidance about your specific situation.
Option 6: Abandon the Token
Some taxpayers consider “abandoning” dead tokens. For a loss from abandonment, the taxpayer generally must show both an intent to abandon the property and an affirmative act of abandonment.
The IRS Chief Counsel concluded that a taxpayer did not abandon cryptocurrency where the taxpayer retained ownership, dominion, and control over the cryptocurrency and did not take affirmative steps to abandon it.
Sending Tokens to a Burn Wallet
Some investors ask whether they can abandon a token by sending it to a burn wallet address. This may be an affirmative act, but it is not automatically a good tax strategy. The key tax issue remains whether the loss is actually sustained in a closed and completed transaction, fixed by an identifiable event, and whether the taxpayer has truly given up control and economic rights in the asset.
A burn-wallet transfer may also be a digital asset transaction that must be evaluated carefully, because the IRS states that taxpayers generally must answer “Yes” to the digital asset question if they dispose, sell, exchange, or transfer ownership of a digital asset, including in exchange for property, goods, or services, or by paying a transfer fee with digital assets.
For many individual investors, an actual sale or exchange for even minimal value may be easier to document than an abandonment position, especially where the tax benefit of abandonment is uncertain.
Option 7: Keep Holding the Token
You can keep holding a dead or nearly worthless token, but merely holding it does not generally create a deductible loss. IRS guidance states that if you only hold digital assets in a wallet or account and do not engage in a digital asset transaction during the year, you generally answer “No” to the digital asset question.
However, continuing to hold the token also means you may not yet have a recognized tax loss, because there may be no sale, exchange, abandonment, worthlessness event, theft, or other closed and completed transactions.
Option 8: Sell the Token to a Friend
Selling a dead token to a friend can create a taxable disposition, but it should be handled carefully. If you sell or exchange a digital asset held as a capital asset, you generally recognize capital gain or loss based on the difference between your adjusted basis and the amount received.
A real sale to a friend for a small amount, such as $1, $10, or a determinable fair market value, may be more straightforward than trying to support a completed transaction position. The transaction should be bona fide and documented with the date, token name, number of units, wallet addresses, amount paid, payment method, and transaction hash if available.
Be cautious if the arrangement is not truly a sale. If the friend does not actually pay, if you retain control over the token, or if there is an agreement that the friend will later return the token, the transaction may be vulnerable because deductible losses must be bona fide and are determined based on substance rather than mere form.
If the sale is respected, the holding period determines whether the resulting capital loss is short-term or long-term: short-term if held not more than one year, and long-term if held more than one year.
Please note that if the “friend” is actually a related party listed in § 267, such as a family member, certain controlled corporations, certain trusts/beneficiaries/fiduciaries, or other listed relationships, then no deduction is allowed for a loss from a sale or exchange directly or indirectly between those related persons.
Reporting Digital Asset Transactions
If you have digital asset transactions, the IRS states that you must report them whether or not they result in taxable gain or loss.
Taxpayers who sold, exchanged, or otherwise disposed of a digital asset held as a capital asset generally report the transaction on Form 8949 and Schedule D.
Investment property that is not sold or exchanged, including a digital asset burn/abandonment, is usually treated as an ordinary loss under the IRS/TAS guidance. But for individuals it is generally a miscellaneous itemized deduction and is not deductible for 2018–2025 because miscellaneous itemized deductions are suspended.
Taxpayers should keep records documenting the purchase, receipt, sale, exchange, or other disposition of digital assets, including fair market value measured in U.S. dollars, basis, dates, times, and number of units.
Practical Documentation Checklist
For a dead-token sale, exchange, burn-wallet transfer, abandonment claim, theft claim, or bankruptcy-related disposition, keep records showing:
- Token name and contract address.
- Number of units.
- Acquisition date and time.
- Acquisition cost and adjusted basis.
- Disposition date and time.
- Transaction hash or platform confirmation.
- Wallet addresses involved.
- Amount received, if any.
- Fair market value in U.S. dollars.
- Any fees or transaction costs.
- Evidence of theft, bankruptcy, platform freeze, delisting, or other relevant event.
- Communications with exchanges, platforms, bankruptcy administrators, or counterparties.
The IRS states that taxpayers should maintain records sufficient to establish positions taken on federal income tax returns.
Final Thoughts
A token becoming nearly worthless is usually not enough by itself to claim a tax loss. A tax loss generally requires a sale, exchange, theft, worthlessness event, abandonment, settlement, or another closed and completed transaction.
For many investors, the most defensible approach is often an actual sale or exchange, even for minimal value, because it creates clearer tax documentation than simply holding a dead token or attempting to abandon it.
Burning tokens may be an affirmative act, but it is not automatically better than a sale and may create reporting and substantiation questions.
Selling to a friend can be viable if the transaction is real, documented, and respected in substance, but sham or circular transactions should be avoided.
