Exchange bankruptcy event

Forum|Forum|2 years ago
November 15, 2023
6 replies
70 views

For those involved in an crypto exchange bankruptcy event who have lost their entire investment or a portion, how is this to be handled as a taxable event? How to report a loss?

Ask the Experts - Crypto - Nov 2023

evelynm

Employee Tax Expert

Hello:

Once a crypto company’s bankruptcy is settled and discharged and your crypto is deemed worthless it is an ordinary loss An ordinary loss from a worthless or abandoned investment is a miscellaneous itemized deduction in the year of worthlessness/abandonment but is not deductible on your tax return because the Tax Cuts and Jobs Act of 2017 disallows miscellaneous itemized deductions for tax years 2018-2025.

Have an amazing day. Evelyn M (CPA 20+ years). I would love a thumbs up :) + Mark the post that answers your question by clicking on "Mark as Best Answer".

DashonnonH

Level 5

Hello Drazgo, I hope your day is going well.

If your crypto investment still has some value and you sell it at a loss, you can claim the loss on your tax return. First, the losses will reduce any other investment gains for the year.

If you still have losses after offsetting your gains, you can reduce ordinary income up to $3000 for the current year. Any leftovers will be carried over to the next year and used in the same manner each year, until fully used.

However, if your crypto goes totally worthless and cannot be sold. You must deduct on Schedule A as miscellaneous itemized deduction. The issue here is the miscellaneous itemized deduction has be suspended until 2025. Meaning if your crypto became worthless any year before 2025, you would not see any type of deduction on your tax return.

I added a resource to review below

https://www.taxpayeradvocate.irs.gov/news/tas-tax-tip-when-can-you-deduct-digital-asset-investment-losses/

EleanoreS

Employee Tax Expert

Good day,

I am sorry you had a loss resulting from the bankruptcy of a crypto exchange.

IRC section 165 https://www.law.cornell.edu/uscode/text/26/165 makes two points that affect the answer to this question:

Worthless Securities: When the security is worthless, it is treated as capital loss, and up to $3K is deductible. But alas, crypto is not security.
Personal Loss: Personal loss is a Miscellaneous Deduction that is no longer available. And that's what worthless crypto is considered. (IRS Digital Assets).

In addition, this article provides you with information about the tools and resources TurboTax has available for crypto investors.

Thank you for reaching out to the TurboTax community.

Anonymous

Hi @drazgo ,

When a Crypto platforms files for bankruptcy, your crypto assets might be frozen. While the bankruptcy court finalizes the distribution of assets (if any are available) , it is important you gather all your documents related to your crypto accounts ( CSV files, trade history, account balances, etc..) to have proof of value and cost of your crypto.

Once the the bankruptcy is settled and if your crypto (all or portion) is deemed worthless, then the losses are ordinary losses reported as miscellaneous itemized deductions but is not deductible for tax years 2018-2025 because of the Tax Cuts and Jobs Act of 2017.

Thank you!

drazgoAuthor

Level 2

Thank you all for your responses.

What about if I am only returned a portion of the crypto assets, with some assets being converted (i.e. they pay me back from crypto A in the form of crypto B instead of in kind), and the rest is taken/lost/used per whatever bankruptcy ruling allows them to do, etc.

Do I use the rules above to write off the loss of that crypto in total? I have no way to track which blocks were bought at what price at this point once returned me, so how do I account for this as my understanding is that every conversion is supposed to be recorded?

For example, if I bought blocks of ETH for $4800, $3300, and $2100 allotting up to 3 ETH in total... and I am returned 1.25 ETH, do I average the cost and loss? Or do I take highest to lowest to write off?

Thank you

DashonnonH

Level 5

Drazo, if your crypto has some value and you receive payment at the end of the bankruptcy proceedings, this is considered a sale of the crypto. Reported as any other sale on form 8949 and Schedule D.

If you receive crypto in exchange. You should allocate/divide the crypto received evenly across crypto sold. You can choose the best accounting method for your situation. I attached an article that explains the different accounting methods allowable with crypto. First in First Out, Last In First Out, Highest In First Out.

https://coinledger.io/blog/cryptocurrency-tax-calculations-fifo-and-lifo-costing-methods-explained

If you receive new crypto in exchange, this is also considered a sale of the old crypto and purchase of new crypto. Report as any other sale on form 8949 and Schedule D of your tax return.

You will need to be able to prove your basis for the crypto, if requested by the IRS. If you cannot track and prove basis the IRS considers basis $0.