Are Crypto Losses on FTX and BlockFi a Tax Write Off?

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.