Can You Deduct Crypto Stolen From Your Polymarket Wallet or Lost to a Scam?

Possibly. Stolen funds are deductible for an individual only if the theft is tied to a business or a transaction entered into for profit, because personal theft losses are now barred outside declared disasters. An IRS Chief Counsel memo found that hacked and phished investment accounts can qualify, and money held to trade prediction markets has a fair argument for the same result. No IRS document addresses a prediction market wallet. If it qualifies, you deduct your basis, not the current value, in the year you discover the theft, and you generally must itemize.

OddsFile is software, not tax advice. The IRS has not issued guidance on how prediction-market contracts are taxed. This article explains the options and the sources behind them; a tax professional can tell you which position fits your situation.

The statute

Section 165(c) limits individual losses to three groups:

1. Losses in a trade or business.
2. Losses in a transaction entered into for profit.
3. Personal casualty or theft losses.

Group 3 is largely closed. §165(h)(5) allows personal casualty losses only if attributable to a federally declared disaster or, from 2026, a state declared disaster, or up to personal casualty gains. Public Law 119-21 removed the old end date, so this limit no longer expires. A wallet hack isn't a disaster, so the question is whether your stolen funds fall in group 1 or 2.

What the IRS memo says

Chief Counsel Advice 202511015 covers five scam victims:

A footnote says a hacked account gets the same analysis as phishing. Where you didn't authorize the transfer, the memo looks to the original investment and your motive at that time. The IRS points victims to the memo in Publication 547 and the Form 4684 instructions, which list three conditions:

• The loss results from criminal conduct classified as theft under applicable state law.
• There's no reasonable prospect of recovering the funds.
• The loss arises from a transaction entered into for profit.

The memo has limits. It is non-taxpayer-specific advice, its examples involve securities and financial products in brokerage and IRA accounts, and written determinations can't be cited as precedent. It also covers 2024 facts, before the 2026 amendments.

Applying it to a prediction market wallet

What remains unsettled:

• Gambling treatment. If you say your contracts are wagers, is a bankroll held "for profit" in the §165(c)(2) sense? The memo doesn't address gambling. Whether §165(d) reaches a theft is also unaddressed, though on its face it covers losses from wagering transactions, and theft isn't a wager.
• Whether idle stablecoins are "invested". The memo found a profit motive for investments. Dollar-pegged funds waiting for the next trade are a less direct fit.

Timing and the recovery test

Under §165(e), a theft loss is sustained in the year you discover it. The memo adds that nothing is deductible if a reasonable prospect of recovery exists at year end. That needs a bona fide claim with a substantial possibility of success, but you don't have to prove zero chance of recovery.

In the memo, the victims reported to law enforcement and their institutions and were told recovery was unlikely. Do the same, and keep the report. If a platform promises reimbursement, the funds are frozen, or a claim is pending, the deduction may need to wait. Money recovered after a deduction generally comes back as income, to the extent the deduction reduced your tax.

How much you can deduct

The amount is your adjusted basis, less any reimbursement. Unrealized gain doesn't count.

Example. A hacker takes $10,000 of USDC bought at $1 and shares that cost $2,000 but were worth $5,000. The loss is $12,000, not $15,000.

Report on Form 4684, Section B. For an individual's income-producing property, the 2025 form sends the loss to Schedule A, line 16. The 2026 draft Schedule A has a new line 17d for this, though a draft can change. A trade or business loss follows a different path on the same form, so a Schedule C filer should have a preparer map it.

Itemizing can shrink the benefit

A deduction on Schedule A only helps above the standard deduction. In 2026, that's $16,100 single, $32,200 joint.

A $12,000 theft cut taxable income by only $900. Larger losses do better, and §172(d)(4)(C) treats casualty and theft deductions as business deductions for net operating loss purposes, which can matter if the loss exceeds your income.

The Ponzi safe harbor in Rev. Proc. 2009-20 is usually unavailable. The memo rejected it because it needs a lead figure who has been indicted or named in a criminal complaint.

Records to gather

Keep transaction hashes for the theft, wallet history showing cost, reports to law enforcement and Polymarket with any replies, and evidence the funds were held to trade. See multiple wallets if the funds moved between addresses.

To establish the trading history, run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup. It shows trading results, not a theft computation. If the theft was discovered in an earlier year, you may need Form 1040-X, and because this is a position without direct authority, consider Form 8275.

FAQ

Do the $100 and 10% of AGI reductions apply?

Those apply to personal casualty and theft losses on Section A of Form 4684. The form's Section B, for income-producing property, doesn't use them.

Is a stolen token a sale I report on Form 8949?

The memo treats it as a theft loss under §165, reported on Form 4684, not as a sale.