Celsius Losses

[maonodera]

Hello.  I lost digital assets in the Celsius bankruptcy debacle/case.  How do these losses get calculated?  Thx

[Andrew_W]

Hi @maonodera,

Sorry to hear you're caught up in this! 

This is a complicated scenario, and tax treatment depends on the final disposition of the bankruptcy. Once the bankruptcy is finalized, any assets that are completely lost or not recoverable will be deemed worthless. 

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

"Worthless or Abandoned  

Unlike a sale of a digital asset investment that results in capital gain or loss, the loss from your digital asset investment becoming completely worthless is an ordinary loss. You should note that the asset must be completely worthless, not nearly worthless, for this loss to recognized. 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."

Unfortunately, if the assets are completely lost in this manner, you will be unable to deduct them due to the disallowed miscellaneous itemized deductions through 2025.

[Jmh0523]

The bigger question is, if you can end up writing off what we don't recover, how do we go about doing that? Are we supposed to file an amended return and realize the loss on the day of the bankruptcy when the value of our assets was locked in and dollarized (what it was all worth vs how much we get back today and the difference between the two being the loss)? That happened in July 2022. They gave us a dollarized value of our crypto assets. We are going to get back a small portion of our assets in kind, they won't be giving us dollars but crypto back. Maybe 30%.

We are supposed to find out around the end of this month/beginning of next. Would we address all of this in next year's filing for 2024?

[RobertB4444]

As @Andrew_W says above, you will not be able to write off a digital asset loss.  That option has been removed until at least 2025, if then.

When you were able to write off the miscellaneous deduction you would have written off the exact dollar value that you originally invested in the digital asset and you would have written it off effective on the date the bankruptcy was finalized.

@Jmh0523 

[Jmh0523]

@RobertB4444 He's referring to Worthless or Abandoned which does not apply, we will be receiving a distribution from the bankruptcy. Unless I'm misunderstanding:

"If you received nothing from the bankruptcy settlement, neither money nor your digital assets, then your digital asset investment may be considered worthless and different rules apply. "

....And then the article goes on to talk about what was mentioned about worthless and abandoned. 

[RobertB4444]

Right.  So in this case when you receive the amount that you receive from the bankruptcy you can report that you have sold your digital assets for the amount that you receive, enter in the amount that you paid for them and take a loss on the sale.

@Jmh0523 

[Jmh0523]

@RobertB4444 Ok perfect, however, the caveat is we're not receiving cash we're receiving BTC and ETH. If you held any other crypto with Celsius, they converted it to BTC/ETH during bankruptcy.

For more context, here's the scenario with Celsius if I understand it correctly:

Let's say someone had 1 BTC with Celsius. They dollarized that claim and said your asset is worth $19k at the time of bankruptcy. Fast forward and you're getting around 30% of that $19k, receiving back $5,700 worth of Bitcoin at the current price today (much higher), let's say $40k. $5,700 worth of bitcoin is only 0.1425 BTC. So you're not getting back the other 0.8575 of your Bitcoin (which is now worth $34k unfortunately).

They're actually sending our crypto to paypal and then we have to withdraw the crumbs from there. It's interesting.

I guess the question is how would you tackle that one and file a loss?

[DawnC]

Report it under Investment Sales.  The proceeds will be whatever you get (around $5700) and your basis is whatever you originally paid for that 1BTC.    The difference is a capital gain or loss.  Reporting cryptocurrency is similar to reporting a stock sale.   You'll need to report your crypto if you sold, exchanged, spent, or converted it. 

You have to do this for every trade you make. If you bought coins at different prices or sold partial amounts, you have to keep track and record the difference of what you sold.  The most common way to do this is to download your order or trading history from your exchange’s website.  You may need to do this a few times throughout the year due to limits on how far back you can get information.

Once you have your figures, go here to learn how to add your crypto to TurboTax. 

How is a capital gain or loss calculated?

Where do I enter capital gains and losses?  

Your Crypto Tax Guide

[Jmh0523]

Hi @DawnC, thanks for the reply.

Are you saying I would file it as the sale of 1 BTC for $5,700 and then report $5,700 worth of Bitcoin received from the bankruptcy as income and a new cost-basis begins? And I'm assuming for the date on both of those I'd put when I received the distribution, correct?

One final question, what happens if later we receive a small portion of stock in a NewCo how does that play into the equation? And also, there's a litigation trust where they are trying to clawback and sue bad actors. We may receive a cash distribution from that one day. Does that all change anything?

I do appreciate your time, thanks!

[DaveF1006]

Yes, once you receive the new bitcoin amount, that is taxable income that needs to be reported and a new cost basis would be established. If the loss was recorded on the same date you received the distribution, then that is the date you would use for the disposal of the bitcoin and date acquired for the bitcoin received, which will now be your new cost basis.

As far as the stock received, if this isn't a crypto transaction, this would not be reported and has no effect in your crypto reporting.  In the event you do receive a cash distribution, you would report this in the year you receive it. In all likelihood, this will will reported on a 1099 DIV. Neither will be a factor in your crypto transaction.

Let me know if this helps.

@Jmh0523 

[Jmh0523]

@DaveF1006 

Thank you for the clarification, Dave and team. 

You said, "If the loss was recorded on the same date you received the distribution"....Is this a choice? I'm assuming I can put the day I receive my distribution as the day I record my loss and not have to do an amended return and say the loss occurred the day they filed bankruptcy, (July 2022) correct? 

I appreciate you all taking the time to respond. The most clarity I've received on how we'll have to approach this.

[RobertB4444]

No, not really a choice.  The day that you receive the distribution is the day that you have access and control over the digital assets and that is when they are 'yours'.  Use that date.

@Jmh0523 

[Jmh0523]

@RobertB4444 Thank you for clarifying. I'll use the date I receive the distribution for reporting the new 'income' and for realizing a loss on what I don't get back.

You've all been a lot of help. Thanks.