From riches to glitches: What to do about lost Bitcoin

James Howells unintentionally became one of crypto history’s greatest cautionary tales. In 2013, this Welshman claimed that his ex-girlfriend tossed a hard drive containing over Bitcoin (BTC) into the garbage. Had Howells safeguarded his digital gold, he would now have nearly $800 million worth of BTC at current prices. Despite repeated attempts to search for or even buy the landfill where his hard drive is buried, Howells has yet to recover his lost fortune.

So, what happens when people like Howells lose access to their BTC? Is recovery impossible, or are there legitimate ways to retrieve lost Bitcoin? Learn more about the implications of losing Bitcoin and how to avoid ending up in this costly situation.

How is Bitcoin lost? Common ways people lose BTC

Technically, Bitcoin is never truly "lost." The total circulating supply of BTC always remains on the blockchain and is publicly viewable on its distributed payment ledger. When people say they’ve "lost" Bitcoin, they mean they can no longer access their BTC in a wallet address or exchange account. While individual stories vary, a few common reasons for lost Bitcoin frequently arise:

• Forgotten or lost private keys: In a self-custodial wallet, the private key acts as a master password and is the sole backup for access. If someone misplaces or forgets this crucial information, there’s no way to recover their BTC in a new wallet.
• Discarded storage devices: Many early Bitcoin adopters stored private keys on hard drives or USB devices and later accidentally threw them away. The most famous example is James Howells, who lost access to over 8,000 BTC this way.
• Damaged or corrupted hardware wallets: While hardware wallets are a secure storage option, they aren't indestructible. If a device is physically damaged or its software becomes corrupted, the private keys stored inside may become inaccessible.
• Mistaken transactions: BTC transfers are only valid on the Bitcoin blockchain. If traders mistakenly send BTC to an incompatible wallet address – such as transferring BTC to a Bitcoin Cash (BCH) address – the funds are permanently lost.
• Poor estate planning: Some crypto investors fail to leave behind detailed instructions on how to access their BTC after their death. If no one knows the private key or recovery phrase, it may remain inaccessible forever.

What happens when Bitcoins are lost? The impact of lost Bitcoin

Even though users who lose access to their Bitcoin can still see their coins onchain, this BTC is effectively frozen. Unless crypto wallet experts successfully recover an otherwise inaccessible wallet, lost BTC is permanently removed from Bitcoin’s usable supply.

Since Bitcoin has a hard cap of 21 million coins, lost BTC further reduces the available supply, potentially making the remaining Bitcoin more valuable. As long as demand for BTC holds steady or increases, the decline in circulating supply due to lost Bitcoin could contribute to a higher market price over time.

How many Bitcoins are lost?

The exact number of irrecoverably lost Bitcoins is unknown, but recent estimates suggest around 20% of Bitcoin’s total supply is inaccessible. With the current circulating supply of 19.8 million BTC, that means nearly 4 million BTC could be permanently lost.

Blockchain analysts attempt to estimate lost Bitcoin by analyzing transaction history. The longer a wallet remains dormant, the more likely it is that its owner no longer has access, effectively removing those coins from the active supply—a process sometimes referred to as being “burnt.”

One of the most famous lost BTC stashes likely belongs to Bitcoin’s pseudonymous creator, Satoshi Nakamoto. Nakamoto is believed to have held over 1 million BTC across multiple wallet addresses. Although some transactions have occurred between "Satoshi-era wallets" over the years, many in the crypto community suspect these Bitcoin are permanently inaccessible.. 

2025

Crypto Tax
Guide is here

CoinTracker's definitive guide to Bitcoin & crypto taxes provides everything you need to know to file your 2024 crypto taxes accurately.

Get startedLearn more

How can I find lost Bitcoins?

If users don’t have their private key or relevant data – such as a wallet file or a backup hard drive – recovering lost Bitcoin is nearly impossible. While blockchain explorers allow users to see where Bitcoin is located onchain by entering a wallet address, these tools only provide visibility, not access. To regain control of BTC at a specific address, users need something linked to their private key to have any chance of success.

If private keys were stored on a damaged hard drive, SSD, or USB, data recovery specialists might retrieve them using advanced forensic techniques. Some companies also specialize in crypto wallet recovery, employing methods such as brute-force password guessing or scanning disk remnants to attempt access.

Although quantum computing is still in its early stages, it could eventually aid in recovering lost private keys from old wallets. However, if quantum computers become powerful enough to crack lost keys, they could also pose a serious security risk to the entire Bitcoin network. This potential threat has led some Bitcoin developers to focus on quantum-resistant technologies, but practical applications for Bitcoin wallet recovery remain years – if not decades – away.

Can you claim tax deductions on lost Bitcoin? 

Unfortunately, losing Bitcoin is typically not a tax-deductible event. The IRS once allowed deductions for "casualty and theft losses," which included lost crypto. However, the 2017 Tax Cuts and Jobs Act restricted these deductions to federally declared disasters, making it difficult to claim lost Bitcoin as a tax write-off.

If Bitcoin was lost due to negligence – such as forgetting a private key or sending BTC to the wrong address – the IRS does not consider it a deductible loss. Crypto tax deductions are only possible in cases of theft, hacks, or fraud (e.g., Ponzi schemes), and investors must provide detailed documentation when reporting these losses on their tax forms. In such situations, consulting a crypto CPA can help carefully review the case and determine eligibility for deductions.

How to protect Bitcoin from getting lost 

Since recovering lost Bitcoin is nearly impossible, the best strategy is to prevent loss in the first place. Implementing strong security measures significantly reduces the risk of losing BTC.

• Backup seed phrases: The most important information crypto traders must secure is the seed phrase – a 12, 18, or 24-word list that serves as a backup for the private key. This phrase allows users to restore their Bitcoin balance even if they lose access to their wallet. During setup, write down the seed phrase on paper and store it in a secure location, such as a fireproof safe. For added protection, consider engraving the seed phrase on a metal plate to prevent loss due to fire or water damage. 
• Secure wallets: For optimal security, many crypto investors use cold storage devices like hardware wallets from Trezor or Ledger. These wallets store private keys offline, making them highly resistant to theft and hacking. If using software wallets, ensure they have strong encryption and security features like two-factor authentication (2FA) to prevent unauthorized access.
• Future access plan: Don't wait until a medical emergency to document access details and legal instructions for managing BTC. Store this information in a password manager or physical safe, and include clear instructions in official documents like a will to ensure Bitcoin is transferred smoothly to heirs.
• Test recovery methods: Even a minor error – such as a misspelled word or incorrect word order – can render a seed phrase useless. To verify the backup works, simulate a wallet recovery by opening a new account and using the seed phrase to restore the Bitcoin balance.

Never lose track of crypto transactions with CoinTracker

Wherever you store your digital assets, CoinTracker keeps everything in check. Our Portfolio Tracker syncs with hundreds of exchange APIs and crypto wallet addresses, providing a real-time, accurate view of your crypto net worth. Plus, CoinTracker automatically imports your data into IRS-compliant forms, making tax reporting seamless – whether you're working with a crypto CPA or filing through TurboTax or H&R Block.

Get started for free today and see why over 2.5 million users trust CoinTracker with their crypto taxes. 

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.