Is my FTX loss tax deductible?
The past month has seen the crypto industry in absolute turmoil as crypto titans FTX and Alameda have gone bankrupt, leaving millions without access to their funds. The implosion has far-reaching consequences, and many other exchanges have found themselves experiencing a ‘bank run’ as crypto investors withdraw funds from their accounts. But what actually caused SBF’s crypto empire to crumble so catastrophically, and what does it mean for crypto investors’ tax obligations?
The end of October 2022 was looking bright for web3. It seemed like the crypto industry was finally beginning to shake the dust off from the Terra Luna collapse earlier in the year.
However, CoinDesk broke the peace with an article highlighting Sam Bankman-Fried’s sister companies, FTX and Alameda Research, which had become precariously intertwined. The balance sheet of quantitative trading firm Alameda Research consisted of a huge proportion of FTX’s native token FTT. This trading giant had taken huge liabilities against these illiquid holdings, putting it in a position of potential insolvency if the token price was to go down.
Harrison Dell (Why is this bad for users of FTX?) - “Alameda took on debt on the basis of holding a significant amount of $FTT, and when the $FTT price plummeted Alameda has fewer assets than debt on its books. When that debt was recalled, Alameda was insolvent.”
A few days after the article was released, Changpeng Zhao (AKA ‘CZ’), co-founder and CEO of rival exchange Binance, announced they would be selling their US$580 million holdings worth of FTT. Immediately following this announcement, the FTT price fell through the floor.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4— CZ 🔶 Binance (@cz_binance) November 6, 2022
As Binance began liquidating their FTT, there was a simultaneous “bank run” on FTX, with users frantically withdrawing all their funds from the platform for the safety of their wallets. This series of events proved catastrophic for both Alameda Research and FTX. After only US$4.5 billion worth of crypto had been withdrawn, the exchange paused all withdrawals, leaving over US$10 billion worth of user deposits locked on the platform.
BREAKING: #FTX temporarily halts withdrawals, on-chain data reveals.— Watcher.Guru (@WatcherGuru) November 8, 2022
Briefly, Binance stepped in, offering to take over FTX and fulfil all liabilities. However, after less than a day, Binance backflipped on the decision, citing that due diligence had revealed they would be unable to help FTX.
In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.— Binance (@binance) November 9, 2022
Following this announcement, crypto mogul and founder of TRON, Justin Sun, announced that he would back any TRON-based tokens locked on the exchange. Seeing an opportunity to withdraw, FTX users rushed to exit, temporarily pushing the price of all Sun-backed tokens almost 50 times higher on the platform than the true market value. After withdrawing, they received an immediate 80-95% loss due to this price discrepancy.
Since then, FTX has filed for bankruptcy, allegedly suffered a hack for almost US$1 billion in user assets and is now being investigated by Bahamian authorities and the Department of Justice for criminal misconduct.
It still remains unclear whether affected FTX users will receive any of their deposits back, which may affect this year’s tax obligations for affected individuals. CryptoTaxCalculator can assist in recording any crypto lost to FTX to include in your overall tax report. Users can import the transaction records from the downloadable FTX CSV or API; however, the API functionality could be impacted by any future outcomes of the implosion.
Head of Tax at CryptoTaxCalculator Matt Crofts says, “Each Tax Jusistiction has different rules when it comes to writing off a tax loss. We recommend you seek professional tax advice before writing off a tax capital loss as the laws are complex. For example, in Australia, a taxpayer can claim a capital loss when a CGT C2 Loss or Destruction event happens to your crypto assets. Generally, where you can recover an item it is not lost, which may delay the process until more details of the FTX events are determined. In the US if your crypto funds become totally worthless and irrecoverable, you may be eligible to write them off as a nonbusiness bad debt on your taxes.”
In addition to the inability to retrieve their deposits, FTX users must also consider other important factors. The end of the fiscal year is approaching in many countries, so if the situation is not resolved by the end of the year, those affected will need to determine how to handle it for tax purposes.
Retail participants and crypto hedge funds both had funds stuck on FTX’s exchange at the time of the bankruptcy filing. The initial reaction is to attempt to retrieve or potentially ‘claw back’ the crypto from entities that received customer funds in the form of donations or similar methods. It becomes difficult to know how users should treat lost crypto due to platform bankruptcy, as it is yet unknown whether users will receive back some or all of their deposits.
It’s important to note that in most situations if you declare your assets as ‘lost’ and then gain access to them again in the future, they will have a cost basis of zero. This means selling them will result in an immediate gain equivalent to 100% of the value of the assets sold.
It is recommended to gather the necessary records so you can provide evidence for your claim of the capital loss whenever clear confirmation is provided from regulators.
Important records to substantiate the FTX loss could include:
- Records of the cost basis of the lost assets
- all transaction records from FTX
- Additionally, screenshots of the assets on the platform could help
FTX reported having over 30,000 users in Australia. FTX Australia is currently being administered, and until confirmation is provided from the administrator, Australian FTX users will not be entitled to claim a capital loss. It could take years before the administrator can fully assess the situation and determine what is left over to distribute to users.
In Australia, the ATO has provided a list of guidelines outlining what requirements need to be met in order to claim crypto assets as ‘lost’. The ATO guidance determines the timing of the capital loss to be when compensation is first received or, if none, then when the loss is discovered.
This specific case falls into a grey area in current US tax law. Although the IRS treats cryptocurrency much like stocks and other capital assets, the SEC has not classified cryptocurrency as a security, meaning the IRS might not allow you to write off any frozen and unsold crypto as "worthless." FTX crypto customers may eventually recover some amount, so claiming an FTX account as worthless might not be correct. This current situation means a taxpayer may be forced to wait until the bankruptcy court authorizes payments to FTX account holders, a process that could take months or years.
FTX reported having 80,000 users in the UK. In the UK, you’ll have to file for a Negligible Value Claim with the HMRC in order to declare any assets as ‘lost’.
The FCA said in a statement: "In the UK, regulation of crypto assets is limited to registering of UK-based crypto-asset exchanges for anti-money laundering purposes. As a result, FTX was not authorised, regulated or registered by the FCA." The regulatory body added that investors will not get their money back “if things go wrong".
It is highly recommended that you speak with a local tax professional about your specific situation in any tax jurisdiction.
CryptoTaxCalculator can help with that. The CryptoTaxCalculator platform can help users who lost funds to the FTX collapse track the cost base of the lost assets, as well as store records of their FTX transactions. For any CryptoTaxCalculator users who had already uploaded their transactions to their account, they may find the “Transactions Report” helpful if/when the time comes to submit a loss claim for tax purposes.
The collapse of FTX has forced many crypto investors to move assets off centralised exchanges and into personal wallets. If you have decided to take the leap into the decentralized world of peer-to-peer finance, we are here to make that transition a whole lot smoother. CryptoTaxCalculator helps you keep track of your blockchain and DeFi transactions across a whole host of different blockchains, making it simple to not only stay on top of crypto tax reporting obligations but also follow DeFi portfolio performance. Detailed transaction categories and tax settings allow for fine-tuned control of tax treatment for any crypto activity, no matter how complex.
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