With the ongoing Chapter 11 Bankruptcy cases with Celsius & Voyager - i see we can claim the crypto lost there as an 'investment loss'. Or a casualty loss - which is not tax deductible.
If we make it as an investment loss, can you let know the steps in detail as to how to mark it as loss.
Please let know if my above understanding about bankrupt exchanges & investment loss is incorrect.
You can deduct worthless stock only in the tax year it becomes completely worthless. This normally happens when the corporation files for bankruptcy, stops doing business, and has no assets. Financial difficulties won't make a company's stock worthless unless there's no hope that the company will pull through.
Enter a worthless stock like any stock sale but with a sales price of zero and the word worthless in its description. Enter the correct cost or basis, date acquired, and December 31 as the date sold.
To enter the bankruptcy without a 1099-B follow these instructions:
Continue with the information for your sales
You would enter all of the information as though you did have a 1099-B with worthless as the description and December 31, 2022, as the date sold.
Wow! That is a good question. What did you own? In a bankruptcy like this, it is often not clear whether an investor or the cryptocurrency company owns the crypto assets. What is your investment?
Let me continue with my comments. In accounting and in Tax, in this case, you can only take a deduction that is 1. Allowable and 2. loss is only deductible once there is no longer a reasonable expectation of recovery. In my professional opinion, we don't know what the courts will rule in these bankruptcy proceeds. Chapter 11 allows for a plan of reorganization to keep its business alive and pay creditors over time. There are variables here that we cannot answer at this time so the Courts guidance will have a hand in the timing of any deductions for the taxpayers.
So to ellaborate more on the Voyager case in particular. I had no holdings in Celsius. The estate determined a "claim value" based on your total crypto holdings on the Voyage exchange prior to claiming Chpt. 11. This is from my personal claim info page.
"Your claim amount was calculated based on the U.S. dollar price of the crypto assets in your Voyager account as of July 5, 2022"
Now where it gets murky is that is your total claim value has NOT been received yet. The estate has already distributed roughly %30 percent of your total claim value back in kind but the remaining %70 is held pending future litigation with FTX etc. The initial %30 of your total claim value came back as crypto in kind but some crypto assets that were not supported in the estate liquidation where sold (on my behalf) and redistributed in the form of USDC stable coin the others were also sold (on my behalf) but came back in same form just less coins.
So two things to clarify. The coins that came back in kind there is loss meaning I have significantly less coins of that asset from the redistribution. The usdc stable coin that was retrieved for selling non supported assets by the estate is also a loss on total original value my cost basis. These issues to me seem like I should be able to claim these losses somehow. Where it gets confusing for me is the future distribution of any recoveries from chapt 11 will be in Fiat no more crypto and there is a sizable IF that even happens or they are able to win in court to fund future recoveries.
I guess what I'm not sure is what do I use as my cost basis and can I claim these losses of the 30% I got back even though I didn't sell but the estate liquidated on my behalf. There are sizable losses here for everyone involved and would help greatly to offset any future capital gains. We have gotten back part of our claim the 30% so it should on '23 tax in some form I believe but not familiar with bankruptcy. I believe this is the first case of chapter 11 involving crypto also.
The total claim page gives quite a lot of info:
coin type held | 7/5 liquidation price | quantity | claim amount
Then the June 2023 in-kind distribution claim breaks down what you got back as:
You can't claim any loss until the case is finally settled and all monies are paid out. That may take years. You might have received some interim amount, you might have made a claim for a certain value, but you can't declare the loss on your tax return until the loss is fully realized—you get all the money you might ever get and there is no more on the way, the court case is closed.
At that point, you have a gain or loss based on the difference between the amount you invested (your cost basis) and the amount realized. Suppose you invested $1000, and at some point the investment was theoretically worth $50,000, and you receive a $500 payout. You have a $500 loss only. Or, suppose you invested $1000, and at some point the investment was theoretically worth $50,000, and you eventually receive $3000. You have a $2000 capital gain, not a loss.