Did you lose access to cryptocurrency held on FTX or BlockFi?
It’s possible that you could write off the value of your lost cryptocurrency and save thousands of dollars on your tax return.
In this guide, we’ll break down everything you need to know about how lost cryptocurrency from an exchange bankruptcy should be reported on your tax return.
What’s happening to FTX?
FTX is the parent company of FTX.US. At its peak, FTX was the world’s second largest exchange by volume. The company had close ties to BlockFi and was set to acquire the platform in June 2023.
After reports of liquidity issues and mismanagement of customer funds in November 2022, FTX and BlockFi halted customer withdrawals.
On November 11, 2022, FTX officially filed for bankruptcy, causing the values of cryptocurrencies like Bitcoin and Ethereum to plummet.
Will I regain access to my cryptocurrency?
At this time, it’s unclear whether FTX and BlockFi customers will regain access to their cryptocurrency. It may take
months or even years for customers to get a definitive answer to this question. Who receives funds in a company bankruptcy?
It’s important to remember that bankruptcy proceedings are often a long, complicated process that can take years to sort out.
When a company files for bankruptcy, creditors take control of the company. At that point, they must decide whether to liquidate the company or ‘restructure’ to maximize customer value.
In the case of a liquidation, an exchange’s funds will be redistributed to its creditors. Given the size of the hole in FTX’s balance sheet—assets on hand vs. liabilities owed—it’s highly unlikely creditors will be made whole.
FTX and BlockFi retail customers are likely to be considered ‘unsecured creditors’ in the bankruptcy proceedings. As an unsecured creditor, you may get paid out on asset liquidation
after other creditors who may be higher in the liquidation order based on contracts and/or agreements with FTX and BlockFi. Can I write off my crypto losses if I lose access to my crypto?
Many tax professionals argue that in the case you lose access to your crypto permanently due to exchange bankruptcy, you can write off the value of your lost crypto as an ‘
’ and deem the assets worthless. By doing so, you are relinquishing your rights to claim the assets in the future. investment loss
Investment losses can offset your
and up to $3,000 of ordinary income for the year. Additional losses can be rolled forward into future tax years. capital gains
However, given that FTX and BlockFi investors don’t currently know whether they will receive their investment back, or to what extent, it’s unclear what portion of their investment is completely and permanently ‘lost’. You should consult a
crypto tax professional with questions on the specifics of your situation.
Another option is to treat cryptocurrency lost to exchange bankruptcy as a casualty loss. However, these types of losses are considered non-deductible after the Tax Cuts & Jobs Act of 2017.
For more information, check out
. our guide to lost & stolen cryptocurrency How do I report my cryptocurrency taxes?
If you’re looking for an easy way to report your cryptocurrency taxes, CoinLedger can help.
automatically integrates with FTX, FTX.US, BlockFi and other exchanges and blockchains to help you report your taxes in minutes. CoinLedger Get started today with the crypto tax software trusted by 400,000 investors across the globe. . Get started with a free preview report today