How to report Celsius Network Clawback Settlement Payment when not receiving any estate distributions

[user314]

I had an account on the Celsius crypto exchange that went bankrupt in 2022. I was fortunate to have gotten out of Celsius before they closed down but then unfortunate to be sued for preference clawbacks. I eventually settled and made clawback settlement payment via wire in 2025. 

How do I report my loss for the settlement payment on my 2025 taxes (US)?

[MelindaS1]

You may be able to take a § 1341 credit for the amount of the repayment in excess of $3,000 that you previously included in your taxable income (and paid tax on). See TurboTax article, "What is a claim of right repayment?" for detailed guidance on figuring and entering this credit. 

In your fact pattern, you state that you only received about 1/3rd of the repayment amount as interest income; so it seems 1/3 of the repayment would represent a repayment of previously reported interest income for purposes of the 1341 credit. You also state you liquidated all of your crypto positions in a prior year; presumably, some amount of the repayment total would be figured as previously reported and taxed capital gain income. 

Importantly, to the extent that your settlement repayment is offset by any distributions you received from the bankruptcy estate, that portion of the repayment is nondeductible / nonrecoverable (since you already recovered it out of the bankruptcy estate). And if your bankruptcy estate distributions at all exceed the amount lost in preference repayment, those amounts would be includable in the year received and taxable as income.

Because you state that you closed your account with Celsius before their bankruptcy proceedings, and you state that you then reinvested those redemptions of basis and earnings into other, later crypto investments, then I do not see why you would take a capital loss for the amount of the 2025 lawsuit settlement. Did you ever fully forfeit your total original cost value in the crypto or stablecoin investments due to bankruptcy or lawsuit proceedings? If not, I would not characterize this as a total loss of investment value or worthless security. Instead, any repayment can offset net gains / income (such as bankruptcy distributions) in the year received, or be calculated as repayment of previously included and taxed income. You should seek the guidance of a crypto-focused investment tax specialist (CPA or lawyer). 

See also: IRS - FAQs Related to Ponzi Scenarios for Clawback Treatment

[user314]

Thank you for the info, I appreciate it. 

[DianeW777]

Yes, you do need to report it. Any amount of money received/earned is taxable regardless of the amount. Report the $20 received from the 'clawback' settlement using the steps below. 

• Where do I enter the award for a taxable legal settlement?

If you do not have tax document you can enter it as follows: 

Other Miscellaneous Income:

1. Sign into your TurboTax Online account
2. Go to Tax Home (left panel)  Wages and Income  section
3. Scroll to  Less Common Income > Select  Miscellaneous Income, 1099-A, 1099-C
4. Select Other reportable Income > Enter a description (----) and the amount

@user314