An investment theft loss is a theft loss on property that was held, or handed over, in a transaction entered into for profit. Crypto sent to a fraudulent trading platform, or held in an exchange account that was hacked, is the usual example. The label turns on why the property was in the transaction, not on the type of asset.
The phrase describes the reason the property was where it was when it was taken. A trader who deposits USDT with a platform to earn a return, funds an exchange account to trade, or sends crypto to what they believe is a managed strategy has entered into a transaction for profit. If that platform turns out to be a fraud, or the account is hacked, the loss sits in the investment category.
The same asset lost for a different reason falls elsewhere. Crypto extorted through a threat, sent to a romance scammer with no expectation of return, or taken from a wallet that was never part of any profit-seeking activity is a personal theft loss.
A pig-butchering scheme is the clearest case. The victim is coached into funding a fake trading platform that displays fabricated gains, adds more capital, and is locked out on trying to withdraw. Similar facts arise with a fraudulent yield platform, a fake token presale, and a Ponzi scheme loss where new deposits paid earlier investors.
An exchange hack can qualify where the account was opened and funded to trade. A cold wallet drained through a phishing signature is harder, because holding coins in it may not have been part of any profit-motivated transaction.
Two tests. The first is that a theft occurred, judged under the law of the jurisdiction where the property was taken. Treasury Regulations section 1.165-8 governs the theft loss deduction and is the starting point for every crypto theft loss. The second is the profit motive. IRC Section 165(c)(2) allows an individual to deduct losses incurred in any transaction entered into for profit. A theft of property that was in such a transaction is deductible under that subsection rather than under Section 165(c)(3), which covers personal losses.
Section 165(h)(5) limits personal casualty and theft losses for tax years beginning after 2017 to losses attributable to a federally declared disaster, which removes almost every personal crypto theft from deduction in those years. It does not reach losses under Section 165(c)(2). A Section 165(c)(2) theft loss is also not a miscellaneous itemized deduction, because Section 67(b)(3) excludes casualty and theft losses described in Section 165(c)(2) from that category, so the suspension of miscellaneous itemized deductions does not apply to it.
Revenue Ruling 2009-9 applied this reasoning to Ponzi scheme investors, holding that their losses are theft losses in a transaction entered into for profit under Section 165(c)(2), not capital losses, and not subject to the Section 165(h) limitations. In 2025 the IRS Office of Chief Counsel applied the same framework to individual scam victims in Chief Counsel Advice 202511015, treating funds moved to a scammer in the expectation of a return, including through a fake trading platform, as Section 165(c)(2) theft losses, and treating a romance scam and a kidnapping-style extortion scam with no profit motive as personal losses caught by Section 165(h)(5). Chief Counsel Advice is not precedent, but it shows how the IRS reads the profit motive line.
Classification opens the door; it does not fix the amount or the year. The loss remains subject to the discovery year rule in Section 165(e) and the reasonable prospect of recovery rule in Treasury Regulations section 1.165-1(d), and it is limited to the adjusted basis in the property taken.
The profit motive has to be evidenced, not asserted. A deposit to a fraudulent platform looks on chain like any other transfer to an exchange wallet. Without the platform statements, the chat history that induced the deposits, the dashboard screenshots showing purported returns and the refused withdrawal, there is nothing to show why the crypto went there. Victims routinely delete this material out of embarrassment, and the deduction goes with it.
Read our 2026 Guide to Claiming Crypto Losses from Fraud, Scams, Theft
CountDeFi specializes in fraud, hack and theft loss accounting, including fraudulent trading platforms, exchange account takeovers and the evidence file behind the profit motive. See pricing.
