Xuan-Thao Nguyen (University of Washington) & Jeffrey A. Maine (Maine), Crypto Losses, 2024 U. Ill. L. Rev. 1119 (reviewed by Young Ran (Christine) Kim (Cardozo; Google Scholar) here):

The crypto industry has been hit hard with various market forces and scams, leaving investors with trillion-dollar losses in recent years. The appropriate tax treatment of such losses has yet to be fully examined, as there is scant guidance and a dearth of academic literature on the subject. This Article attempts to fill this gap by applying general tax principles to crypto losses and making several recommendations to improve the clarity and consistency of tax results.

It explores various theories of crypto loss “realization” (including theft, abandonment, and worthlessness), highlighting where additional guidance is needed. And it considers appropriate legislative limits on crypto loss deductions recognizing that, by offering a tax deduction subsidy, the government essentially shares in the risk created by crypto activities. The Article proposes a possible new tax framework for crypto losses—specifically, crypto losses should be deductible only against crypto gains and not against labor or other positive income. Such a rule would not be based on moral disapproval of crypto trading as opposed to other investment activity, but instead would be supported by the unified justification underlying many loss limitation rules in our tax system.

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