Recovering a wallet feels like getting something new, so people ask whether the IRS sees it as income. In the usual case it does not. You owned the coins before you lost access, and getting access back does not change that. The tax question that does arise is smaller and more specific: how you pay the fee.
This guide covers US federal tax only, using the IRS's own published position.
The short answer
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- Getting access back to your own coins: not a sale, exchange or payment, so no gain is triggered by the recovery itself.
- Paying the fee in crypto: a disposal of those coins. You may owe capital gains tax (or have a loss) on the part you hand over.
- Paying the fee in dollars: no disposal. Your cost basis in the recovered coins is untouched.
- Selling the recovered coins later: taxed as it would have been had you never lost them.
Why the IRS treats this as property
The IRS states that digital assets are treated as property, and that the general tax principles for property apply (IRS digital asset FAQ, A48). Property is taxed when you sell it or otherwise dispose of it. If you sell digital assets for dollars, you recognize a capital gain or loss on the sale (same FAQ, A49).
Recovery work moves nothing to anyone else. The same coins sit at the same addresses, and you again hold the keys. There is no buyer, no payment received, and no exchange of one asset for another. That is why access recovery is not on the list of events the IRS describes as taxable.
Where tax does show up: the fee
A percentage fee is a common structure for recovery work. This site's published pricing is a percentage of the recovered amount, valued at the time of recovery, with no fee unless the crypto comes back (pricing). How you settle a percentage fee decides the tax effect.
| Payment method | Tax effect (US, general rule) |
|---|---|
| Dollars from your bank | No disposal of crypto. You keep your full basis in all recovered coins. |
| A portion of the recovered coins | Disposal of that portion. Gain or loss is its dollar value at payment minus your basis in those coins. |
Worked example with round numbers. You recover 1 BTC with a basis of $10,000, and 0.15 BTC is paid as the fee when 1 BTC is worth $60,000. The 0.15 BTC is worth $9,000 and your basis in it is $1,500 (0.15 of $10,000), so the disposal has a $7,500 gain. The remaining 0.85 BTC keeps $8,500 of basis. The prices are made up for the arithmetic and are not a forecast.
The gain is short term or long term depending on how long you held the coins, which is counted from when you originally acquired them. Records matter here. If you no longer have purchase records for a wallet that is ten years old, rebuilding the basis from the blockchain and old exchange statements is its own task, and it is worth doing before you pay the fee in kind.
The records to keep
- The date and amount of the recovered coins, and their dollar value on that date.
- The fee invoice and how it was calculated.
- Your original purchase records or a reconstructed basis for the coins.
- Transaction IDs for anything that moved, including the fee payment.
What this page does not cover
- Funds stolen by a scammer. Recovering stolen funds is a different situation and a different tax question. Funds already sent to a scammer's address cannot be promised back by any legitimate service. See my Bitcoin was stolen.
- Non-US tax. Rules differ by country.
- Income from hacked or airdropped coins, mining, staking or business activity.
- State taxes.
When to get help
If you are about to pay a percentage fee on a large wallet, ask your CPA how to settle it before you agree on the payment method, since the choice changes the tax result. If your wallet is the problem, start with the assessment. It is free, and there is no fee until your crypto is back.
Related: how recovery services work and how to choose a crypto wallet recovery service.