Earlier this year, Hailey Welch achieved internet stardom with her unique phrase "Hawk Tuah and Spit On That Thang", which led to remarkable success. She leveraged her fame to sell merchandise and launch her own podcast, "Talk Tuah", which quickly became one of the top podcasts.

Recent Crypto Ventures and Their Downfall

Recently, Welch promoted her new cryptocurrency, $HAWK. However, shortly after its launch, the coin's value plummeted to less than 5% of its original value. This led to significant losses for many investors who claimed to have lost their life savings and their children's college funds.The $HAWK coin was deemed a memecoin due to its origin from Welch's catchphrase. Memecoins often face challenges and usually end up being worthless. The DOGE coin is a rare exception.Welch and her crypto partners were accused of "rug pulling". In this practice, investors hype a coin, causing its value to rise initially. Then, key investors sell their holdings at the inflated price, causing the coin's value to crash. The remaining investors are left with nearly worthless coins.An investigation revealed that 96% of the $HAWK coin was held by only 10 addresses, and there was a significant selloff of the coins. Welch claimed that neither she nor her team sold any $HAWK coins and blamed "snipers" for the price drop. But skeptics questioned the high fees and the recipients of those fees.

Welch's Intent and Knowledge

At first glance, Welch may not seem well-versed in cryptocurrencies. She attended several cryptocurrency conferences but claimed to do so to connect with her fans. She partnered with people who appeared to be crypto experts and hired an attorney after becoming famous. However, it's unclear if she always followed her attorney's advice.

Investor Options in the Wake of Losses

Aggrieved investors can file a complaint with the government. Given the publicity, an investigation is likely, and the government may take action to help investors get their money back and prevent similar behavior 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 suspect criminal activity.Private law firms like Burwick Law have also offered help. They have posted on X, inviting $HAWK investors to learn about their legal rights.

Tax Implications of Crypto Losses

Regarding tax returns, the IRS considers cryptocurrency-related losses as capital losses. Capital losses can offset capital gains, but only $3,000 of ordinary income can be offset each year, with the rest carried forward. This rule has been in place for years without adjusting for inflation, providing only a small tax benefit.A taxpayer in the cryptocurrency trading business full time can claim the loss as an ordinary loss.In 2023, the IRS released its Office of Chief Counsel Memorandum stating its position on the deductibility of worthless and abandoned cryptocurrency. A taxpayer cannot claim a deduction if the cryptocurrency can be traded on the open market, even with a significant loss. To claim a worthlessness deduction, the taxpayer must relinquish control of the cryptocurrency. However, the memorandum doesn't explain how to abandon the cryptocurrency.The memorandum also points out that even if the cryptocurrency becomes worthless, taxpayers cannot claim the loss as a miscellaneous itemized deduction due to the Tax Cuts and Jobs Act (TJCA) disallowing such deductions from 2018 to 2025. It's unclear if the TJCA provisions will be extended.A taxpayer may be eligible for a theft loss if the transaction was made with the expectation of profit, such as an investment. But generally, to claim a nonpersonal theft loss, several requirements must be met, including being connected to a trade or business, being illegal in the jurisdiction, and no reasonable prospect of recovery.From my experience, the IRS is likely to disallow a theft loss as the taxpayers still possess the $HAWK coins. Also, with some parties still involved, there may be a reasonable prospect of recovery through refunds or legal judgments.Welch's fame is likely to fade quickly, serving as a warning to those considering getting involved in questionable cryptocurrencies.Steven Chung is a tax attorney in Los Angeles, California. He assists people with tax planning and resolves tax disputes. He is sympathetic to those with large student loans and can be reached at [email protected] or on Twitter (@stevenchung) and LinkedIn.