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Are you worried about losing money due to an exchange shutdown?Â
In 2022, exchanges like Celsius, Voyager, CoinFLEX, and Babel paused withdrawals for all customers due to liquidity issues and uncertainty in the crypto markets.Â
In this article, weâll break down how funds may be distributed in the case of a potential exchange bankruptcy, as well as the tax implications of losing access to your cryptocurrency.Â
Will I get my cryptocurrency back?Â
Thereâs been speculation that with recent market volatility, some exchanges are at risk of bankruptcy. If bankruptcy proceedings move forward, the question of âWill I get my crypto backâ becomes more nuanced and complicated.Â
The answer may depend on the specific facts and circumstances of the bankruptcy proceedings.Â
At a high level, when a company files for bankruptcy, the creditors take control of the company. From here, they must collectively decide whether to liquidate the entire company and all associated assets or ârestructureâ the company in an effort to maximize shareholder value.Â
This is typically a long process as there are many stakeholders at the table to negotiate the restructuring or liquidation.
If youâre a customer of a bankrupt exchange, youâll likely be considered an âunsecured creditorâ. If the exchangeâs assets are liquidated, other creditors will likely receive preferred access to the proceeds. As a result, you may or may not receive access to your proceeds.Â
Instead of liquidating all company assets, if the creditors of the company collectively decide that ârestructuringâ the company with the goal of getting it back to an operating state makes more sense, you may regain the ability to withdraw/deposit your assets again at some point in the future.Â
Can I write off my lost crypto on my taxes in the case of bankruptcy?Â
Itâs unclear how investors should treat crypto lost due to exchange bankruptcies on their tax returns. At this point, it may be too early to tell since investors currently donât know whether or not they will receive their investment back - or to what extent.Â
Some tax professionals argue that losing access to your crypto because of an exchange bankruptcy can be considered an investment loss.Â
Typically, you are required to dispose of your assets in order to claim a capital loss. If you meet the criteria to consider your investment as âworthlessâ, you can claim the loss. However, by doing so you are relinquishing your rights to claim the assets in the future.Â
Investment losses can offset your capital gains during the year and up to $3,000 of income. Any losses above this amount can be rolled forward into future tax years.Â
Another option is to treat lost cryptocurrency as a casualty loss â a property loss stemming from a sudden, unexpected, or unusual event. After 2017, these types of losses no longer qualify as tax-deductible through 2025, when they once again become deductible as an itemized deduction on Schedule A.Â
For more information, check out our guide on how lost & stolen cryptocurrency is taxed.Â
If you are using a service where you loan your crypto to the platform (this relationship may be described in the âTerms of Useâ of the exchange) there may be an opportunity to claim the loss as a nonbusiness bad debt if you meet all the criteria required. Â
My cryptocurrency got liquidated because I couldnât post collateral. How is this taxed?Â
Some investors found that their margin positions were liquidated because their exchanges did not allow them to post additional collateral.Â
Unfortunately, liquidations are considered taxable events. Youâll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.Â
For more information, check out our guide on how cryptocurrency margin trades are taxed.Â
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I received staking rewards but I couldnât withdraw them.
Some exchanges continued to pay out staking rewards to customers, despite the fact that they had no way to withdraw their rewards.Â
Typically, staking rewards are considered income at the time of receipt.Â
However, because there is no way for investors to withdraw their staking rewards, itâs likely that this income can be considered non-taxable.Â
How can I report my cryptocurrency taxes?Â
Looking for an easy way to report your cryptocurrency taxes? CoinLedger can help.Â
CoinLedger automatically integrates with major exchanges and blockchains, so that you can file your taxes in minutes. The platform is trusted by more than 400,000 crypto investors across the globe.Â
âGet started with a free preview report today â thereâs no need to enter your credit card details until youâre 100% sure your information is correct!
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