A cash basis taxpayer recognizes a capital loss when the loss is realized.
For example, the bankruptcy is final and you get $10,000 for your account under the terms of the bankruptcy plan.
Assuming you can show that you invested $50,000 into the BlockFi account, you have a $40,000 total loss.
How much of that loss is short term and how much is long term depends on when the investments were
made.
@kaoichmizyuki A further clarification:
You can only write off a loss once the bankruptcy plan is final.
Your post indicates that the only money you will receive is related to Bitcoin that was in your account. Once the bankruptcy is final and you receive a sum of money, you will then have a gain or loss based on your basis in the Bitcoin that was in the account at the time of the bankruptcy filing.
The IRS takes the position that you cannot write off the loss associated with the other crypto coins that were deemed worthless or unrecoverable in the bankruptcy proceeding.
If you had any earnings from the crypto positions prior to the bankruptcy filing and freezing of the account, that income does need to be reported on your tax return.
Edited 5/28/2024 2:23 pm PST