Lost Crypto: Insurance vs Recovery vs Write-Off

Most people think their only option is "ask a recovery service or give up". In reality there are three branches of action depending on your situation. Few of them are mutually exclusive — you can attempt recovery first and write off the loss only if recovery fails.

Branch 1: Insurance — what is actually insurable

Retail crypto insurance is much more limited than people assume. The single biggest misconception: self-custody password loss is NOT insurable. No mainstream insurer will write a policy that pays out if you forget your wallet password — the moral hazard is too high (anyone could claim "I forgot" and pocket the payout). What IS insurable falls into a few buckets:

If you are reading this because you already lost access, insurance is moot — you needed to buy the policy before the loss. Skip to Branch 2 or 3.

Branch 2: Password recovery

Recovery is the only branch that potentially returns your actual coins. It is also the only branch where the cost is contingent on success — pay $30-300 if found, $0 if not. The full cost / time analysis is in our recovery cost guide and timing guide.

Quick eligibility check:

• Have wallet file or seed? Recovery is feasible.
• Have only the address? Recovery is impossible. Skip to Branch 3.
• Funds were stolen, not lost? Recovery does not apply. Report to IC3 / local police.
• Wallet was custodial (Coinbase, Binance, Kraken)? Use their account-recovery flow with KYC.

Branch 3: Tax write-off (US-specific)

Post-2017 TCJA, casualty and theft losses on personal-use property are not deductible (except federally declared disaster). Investment property is different but contested.

# Three IRS frameworks that have been argued for crypto loss:

1. Casualty/theft loss (IRC §165(c)(3))
   - NOT available for personal property after TCJA, until 2026
   - Available for INVESTMENT property under §165(c)(2)
   - Requires proof of theft or sudden, unexpected event
   - Forgetting a password is NOT a sudden event

2. Abandonment loss (IRC §165(a))
   - You permanently abandon the property with no expectation of recovery
   - Must take an "affirmative act" of abandonment (memo 202302011)
   - For lost-key crypto, IRS position is unclear; CPAs differ

3. Worthless securities (IRC §165(g))
   - Crypto is generally NOT a security
   - Not applicable except in narrow exchange-collapse scenarios

# Documentation needed if you attempt the write-off:
- Original purchase records (date, amount, price)
- Wallet address(es) showing the funds
- Affirmative abandonment statement (signed, dated)
- Letter from a recovery service confirming infeasibility (helps a lot)

The "letter from a recovery service confirming infeasibility" is genuinely useful documentation. Many CPAs request it. Honest recovery services will provide one in writing if your case is infeasible.

Decision tree

Did you have insurance BEFORE the loss?
  YES -> File the claim (Branch 1)
  NO  -> Continue

Do you have the wallet file / seed / vault?
  YES -> Attempt recovery (Branch 2)
       Recovery succeeded? -> Done
       Recovery failed?    -> Continue

Are you a US taxpayer with documentation?
  YES -> Consult CPA about abandonment loss (Branch 3)
  NO  -> Loss is unrecoverable; document for personal records

International tax overview

When each branch wins

Related guides

• Recovery pricing 2026.
• Recovery time estimates.
• Custodial vs self-custody.
• Scam taxonomy.

Frequently asked questions