Are you worried about losing money due to an exchange shutdown?
In 2022, exchanges like Celsius, Voyager, CoinFLEX, and Babel paused withdrawals for all customers due to liquidity issues and uncertainty in the crypto markets.
In this article, we’ll 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.
Will I get my cryptocurrency back?
There’s been speculation that with recent market volatility, some exchanges are at risk of bankruptcy. If bankruptcy proceedings move forward, the question of ‘Will I get my crypto back’ becomes more nuanced and complicated.
The answer may depend on the specific facts and circumstances of the bankruptcy proceedings.
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 ‘restructure’ the company in an effort to maximize shareholder value.
This is typically a long process as there are many stakeholders at the table to negotiate the restructuring or liquidation.
If you’re a customer of a bankrupt exchange, you’ll likely be considered an ‘unsecured creditor’. If the exchange’s 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.
Instead of liquidating all company assets, if the creditors of the company collectively decide that “restructuring” 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.
Can I write off my lost crypto on my taxes in the case of bankruptcy? VIDEO
It’s 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 don’t know whether or not they will receive their investment back - or to what extent.
Some tax professionals argue that losing access to your crypto because of an exchange bankruptcy can be considered an investment loss.
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 “worthless”, you can claim the loss. However, by doing so you are relinquishing your rights to claim the assets in the future.
can offset your Investment losses during the year and up to $3,000 of income. Any losses above this amount can be rolled forward into future tax years. capital gains
Another option is to treat lost cryptocurrency as a casualty loss — 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.
For more information, check out our
guide on how lost & stolen cryptocurrency is taxed.
My cryptocurrency got liquidated because I couldn’t post collateral. How is this taxed?
Some investors found that their margin positions were liquidated because their exchanges did not allow them to post additional collateral.
Unfortunately, liquidations are considered taxable events. You’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
For more information, check out our guide on
. how cryptocurrency margin trades are taxed I received staking rewards but I couldn’t withdraw them.
Some exchanges continued to pay out staking rewards to customers, despite the fact that they had no way to withdraw their rewards.
are considered income at the time of receipt. staking rewards
However, because there is no way for investors to withdraw their staking rewards, it’s likely that this income can be considered non-taxable.
How can I report my cryptocurrency taxes?
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