(Photograph by Tayfun Coskun/Anadolu by way of Getty Photographs)
Earlier this yr, Hailey Welch grew to become an web celebrity when she mentioned “Hawk Tuah and Spit On That Thang” to make a person go loopy. She used her fame to promote merchandise and begin her personal podcast (known as “Speak Tuah”) which grew to become the third hottest podcast (behind Tucker Carlson and Joe Rogan).
Just lately, she promoted her new cryptocurrency known as $HAWK. Sadly, quickly after the coin’s launch, its worth plummeted to lower than 5% of the unique worth. Individuals on-line have claimed to have misplaced their life financial savings and their kids’s school fund.
$HAWK has been deemed a memecoin as a result of it originated from Welch’s “Hawk Tuah” catchphrase. Nearly all memecoins fall flat and ultimately turn out to be nugatory. The DOGE coin is one notable exception.
Welch and her crypto companions have been accused of “rug pulling.” In rug pulling, buyers hype a coin (or comparable crypto product), inflicting its worth to initially skyrocket. Quickly after, a key group of buyers (usually insiders who obtained the cash earlier than the preliminary coin providing) promote their holdings on the inflated worth, inflicting the worth of the coin to plummet. The remaining buyers are left holding the bag with an almost nugatory coin.
An investigation confirmed that 96% of the $HAWK coin was held by 10 addresses. There was additionally a important selloff of the cash.
Welch claims that neither she nor anybody else on her crew offered any of their $HAWK cash, implying that they didn’t revenue from the hype. They blame “snipers” — bots that purchase designated cryptocurrencies to benefit from worth discrepancies or arbitrage alternatives. However skeptics questioned the excessive charges and who took these charges.
Welch additionally claimed that she didn’t intend to defraud buyers.
At first look, she doesn’t appear to be the sort to know the intricacies of cryptocurrencies. She has attended a number of cryptocurrency conferences, however she claims to have achieved so to raised join together with her followers.
No matter her data, she has a crew. She partnered up with individuals who look like crypto consultants. She employed an lawyer after turning into well-known, though it isn’t clear whether or not she constantly adopted her lawyer’s recommendation.
Till somebody points refunds or will get a court docket judgment, what can buyers do to reduce their losses?
Aggrieved buyers can file a criticism with the federal government. Given the extreme publicity, an investigation is probably going, and the federal government might take motion to assist buyers get their a reimbursement and deter comparable conduct sooner or later. Traders can contact the Securities and Change Fee, the Commodities Future Buying and selling Fee, and the FBI’s Web Crime Criticism Middle in the event that they suppose legal exercise could possibly be concerned.
Personal legislation corporations might additionally assist buyers. One legislation agency, Burwick Legislation has posted on X, requesting $HAWK buyers contact them to study their authorized rights.
So, can buyers write off the loss on their tax return? The place of the IRS is that cryptocurrency-related losses are handled like a capital loss. Capital losses can offset any capital features. Sadly for taxpayers, capital losses can solely offset $3,000 of unusual earnings yearly, with the rest to be carried ahead. This tough rule has been round for years with out adjusting for inflation and can present a meager tax profit.
A taxpayer within the cryptocurrency buying and selling enterprise full time can declare the loss as an unusual loss.
In 2023, the IRS publicly launched its Workplace of Chief Counsel Memorandum stating its place on the deductibility of nugatory and deserted cryptocurrency. A taxpayer can’t declare a deduction for worthlessness if the cryptocurrency could be traded on the open market, even when there’s a important loss in worth. To say a worthlessness deduction, the taxpayer should relinquish dominion and management of the cryptocurrency and take affirmative steps to desert the cryptocurrency in the course of the tax yr. Nonetheless, the memorandum doesn’t elaborate on learn how to abandon the cryptocurrency.
The memorandum factors out that even when the cryptocurrency grew to become nugatory or deserted, taxpayers nonetheless can’t declare the loss as a result of it’s thought-about a miscellaneous itemized deduction. The Tax Cuts and Jobs Act (TJCA) disallowed the miscellaneous itemized deduction from 2018 till 2025. Whether or not the TJCA provisions shall be prolonged for 2026 and later just isn’t but clear.
The taxpayer could also be eligible to assert a theft loss as long as the transaction was made with the expectation of a revenue, corresponding to an funding. This nonpersonal theft loss just isn’t thought-about a miscellaneous itemized deduction.
Typically, to be eligible to assert a nonpersonal theft loss, a number of necessities should be met. First, the theft should be linked to a commerce or enterprise or as a part of a transaction made with an expectation of a revenue. Second, the theft should be unlawful within the jurisdiction the place the sufferer lives, though a theft conviction just isn’t required. Third, the stolen funds should go on to the scammer and to not an unconnected third social gathering (the individuals who misplaced cash on Enron inventory realized this the onerous method). Lastly, there should not be an inexpensive prospect of restoration.
From my expertise on issues like this, the IRS is prone to disallow a theft loss. They’ll argue that the because the taxpayers are nonetheless in possession of the $HAWK cash, no theft occurred.
Additionally, since a number of the events on the opposite facet of the transaction — specifically Welch and others who created and promoted the $HAWK coin — are nonetheless current, there could also be an inexpensive prospect of restoration both by voluntary refunds or a authorized judgment. Till that’s established, the taxpayers can’t declare the theft loss.
Welch’s fame will shoot down simply as rapidly because it went up. Hopefully it will function a warning for individuals eager about moving into questionable cryptocurrencies.
Steven Chung is a tax lawyer in Los Angeles, California. He helps individuals with fundamental tax planning and resolve tax disputes. He’s additionally sympathetic to individuals with massive pupil loans. He could be reached by way of electronic mail at [email protected]. Or you possibly can join with him on Twitter (@stevenchung) and join with him on LinkedIn.
