A crypto rug pull is a token or DeFi project whose creators take investors' money and leave. In a hard rug pull the developers drain the liquidity pool, mint tokens for themselves or use a contract backdoor to remove funds. In a soft rug pull they sell their own allocation and abandon the project, leaving a token with no support and little value.
A new token launches with a liquidity pool and marketing that drives buyers into it. The developers hold the liquidity provider position, the token's minting rights, or both. In a hard rug pull they withdraw the paired asset from the pool, so the token cannot be sold, or invoke a hidden contract function that transfers holders' balances. In a soft rug pull the team sells its allocation, stops work and disappears, and the price goes to near zero on its own.
The token usually remains in the holder's wallet either way; what changes is whether it can be sold for anything. That matters for tax, because a token that still exists and still trades has not been disposed of.
A memecoin whose deployer removes the liquidity pool an hour after launch, leaving holders with tokens and no market. A yield farm whose migrator contract, advertised as an upgrade, moves every deposited LP token to the developer's address. A project whose team sells the treasury and stops posting, with the token drifting to zero over months.
Only where a theft occurred, and many rug pulls do not meet that test. Under IRC Section 165 and Treasury Regulations section 1.165-8, a theft loss requires that property was taken by an act that is a crime under the law of the jurisdiction where it happened. A developer who drained a pool through a backdoor, or induced purchases with representations known to be false and then took the proceeds, may have committed one. A team that launched an honest but failed project, or sold tokens it was entitled to sell, has not stolen anything; the loss is an investment that went to zero.
Where a theft can be shown, the loss is a crypto theft loss. Buying the token was a transaction entered into for profit, so the loss falls under Section 165(c)(2) as an investment theft loss, outside the Section 165(h)(5) limitation for tax years beginning after 2017. It is sustained in the discovery year under Section 165(e), reduced by any reasonable prospect of recovery, limited to the adjusted basis in the tokens, and reported on Form 4684. Proving the theft is the taxpayer's burden, and for a pseudonymous deployer who was never charged it is a heavy one.
Where no theft can be shown, the loss is a capital loss question, realised only when the tokens are disposed of. A token sitting in a wallet at a near-zero price has nothing to report. Selling it for whatever the remaining liquidity pays realises a capital loss measured against basis, usable against capital gains and then $3,000 of ordinary income a year, with the rest carried forward. In Chief Counsel Advice 202302011 the IRS Office of Chief Counsel took the view that a token which has fallen substantially but still trades is not worthless, and that a loss for worthlessness or abandonment of crypto held for investment is a miscellaneous itemized deduction suspended for tax years beginning after 2017.
Theft loss, capital loss and the Ponzi scheme safe harbor are three different treatments. A rug pull reports no purported income and pays nobody from later investors' deposits, so it is not a specified fraudulent arrangement and the safe harbor does not apply.
Software sees a token whose price feed died and either drops it from the balance, which looks like a disposal that never happened, or keeps it at its last quoted price, which reports a holding worth thousands that cannot be sold. Neither produces a loss the return can support. The tokens have to be either disposed of on chain or shown to have been taken by an identifiable criminal act, and the report has to say which.
Read our 2026 Guide to Claiming Crypto Losses from Fraud, Scams, Theft
CountDeFi specializes in fraud, hack and theft loss accounting, including liquidity drain analysis, theft versus capital loss classification and disposal evidence for dead tokens. See pricing.
