Earlier this year, Hailey Welch became an internet superstar when she said “Hawk Tuah and Spit On That Thang” to make a man go crazy. She used her fame to sell merchandise and start her own podcast (called “Talk Tuah”) which became the third most popular podcast (behind Tucker Carlson and Joe Rogan).
Recently, she promoted her new cryptocurrency called $HAWK. Unfortunately, soon after the coin’s launch, its value plummeted to less than 5% of the original value. People online have claimed to have lost their life savings and their children’s college fund.
$HAWK has been deemed a memecoin because it originated from Welch’s “Hawk Tuah” catchphrase. Almost all memecoins fall flat and eventually become worthless. The DOGE coin is one notable exception.
Welch and her crypto partners have been accused of “rug pulling.” In rug pulling, investors hype a coin (or similar crypto product), causing its value to initially skyrocket. Soon after, a key group of investors (typically insiders who received the coins before the initial coin offering) sell their holdings at the inflated price, causing the value of the coin to plummet. The remaining investors are left holding the bag with a nearly worthless coin.
An investigation showed that 96% of the $HAWK coin was held by 10 addresses. There was also a significant selloff of the coins.
Welch claims that neither she nor anyone else on her team sold any of their $HAWK coins, implying that they did not profit from the hype. They blame “snipers” — bots that buy designated cryptocurrencies to take advantage of price discrepancies or arbitrage opportunities. But skeptics questioned the high fees and who took those fees.
Welch also claimed that she did not intend to defraud investors.
At first glance, she does not seem to be the type to know the intricacies of cryptocurrencies. She has attended several cryptocurrency conferences, but she claims to have done so to better connect with her fans.
Regardless of her knowledge, she has a team. She partnered up with people who appear to be crypto experts. She hired an attorney after becoming famous, although it is not clear whether she consistently followed her attorney’s advice.
Until someone issues refunds or gets a court judgment, what can investors do to minimize their losses?
Aggrieved investors can file a complaint with the government. Given the intense publicity, an investigation is likely, and the government could take action to help investors get their money back and deter similar conduct in the future. Investors can contact the Securities and Exchange Commission, the Commodities Future Trading Commission, and the FBI’s Internet Crime Complaint Center if they think criminal activity could be involved.
Private law firms could also help investors. One law firm, Burwick Law has posted on X, requesting $HAWK investors contact them to learn about their legal rights.
So, can investors write off the loss on their tax return? The position of the IRS is that cryptocurrency-related losses are treated like a capital loss. Capital losses can offset any capital gains. Unfortunately for taxpayers, capital losses can only offset $3,000 of ordinary income every year, with the remainder to be carried forward. This hard rule has been around for years without adjusting for inflation and will provide a meager tax benefit.
A taxpayer in the cryptocurrency trading business full time can claim the loss as an ordinary loss.
In 2023, the IRS publicly released its Office of Chief Counsel Memorandum stating its position on the deductibility of worthless and abandoned cryptocurrency. A taxpayer cannot claim a deduction for worthlessness if the cryptocurrency can be traded on the open market, even if there is a significant loss in value. To claim a worthlessness deduction, the taxpayer must relinquish dominion and control of the cryptocurrency and take affirmative steps to abandon the cryptocurrency during the tax year. However, the memorandum does not elaborate on how to abandon the cryptocurrency.
The memorandum points out that even if the cryptocurrency became worthless or abandoned, taxpayers still cannot claim the loss because it is considered a miscellaneous itemized deduction. The Tax Cuts and Jobs Act (TJCA) disallowed the miscellaneous itemized deduction from 2018 until 2025. Whether the TJCA provisions will be extended for 2026 and later is not yet clear.
The taxpayer may be eligible to claim a theft loss so long as the transaction was made with the expectation of a profit, such as an investment. This nonpersonal theft loss is not considered a miscellaneous itemized deduction.
Generally, to be eligible to claim a nonpersonal theft loss, several requirements must be met. First, the theft must be connected to a trade or business or as part of a transaction made with an expectation of a profit. Second, the theft must be illegal in the jurisdiction where the victim lives, although a theft conviction is not required. Third, the stolen funds must go directly to the scammer and not to an unconnected third party (the people who lost money on Enron stock learned this the hard way). Lastly, there must not be a reasonable prospect of recovery.
From my experience on matters like this, the IRS is likely to disallow a theft loss. They will argue that the since the taxpayers are still in possession of the $HAWK coins, no theft took place.
Also, since some of the parties on the other side of the transaction — namely Welch and others who created and promoted the $HAWK coin — are still present, there may be a reasonable prospect of recovery either through voluntary refunds or a legal judgment. Until that is established, the taxpayers cannot claim the theft loss.
Welch’s fame will shoot down just as quickly as it went up. Hopefully this will serve as a warning for people thinking about getting into questionable cryptocurrencies.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
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