The crypto bankruptcies of 2022-2023 left millions of investors with losses and questions about tax treatment. If ftx bankruptcy tax deduction is your situation, here is what the IRS allows.
FTX, Celsius, and BlockFi Losses
If you had crypto on FTX, Celsius, BlockFi, or Voyager when they collapsed, you likely have a deductible loss. The IRS treatment depends on the specific circumstances. If the loss resulted from fraud (as with FTX), a theft loss deduction may apply. If the loss resulted from insolvency without fraud, a different analysis applies.
Worthless Asset Deduction
If your crypto token has become completely worthless - the project failed, the token has no market, and there is no reasonable prospect of recovery - you can claim a worthlessness deduction under Section 165(g). The loss is treated as a capital loss in the year the asset became worthless. You must demonstrate worthlessness with evidence.
Timing Matters
The year you claim the loss matters. Theft losses are generally deductible in the year of discovery. Worthlessness losses are deductible in the year the asset becomes worthless. If you claimed the loss in the wrong year, you may need to amend your return. If you have not claimed it at all, you may be able to file an amended return for the appropriate year within the statute of limitations.
Maximizing the Benefit
A crypto tax attorney can analyze your specific situation, determine the proper classification of your loss, ensure you claim it in the correct year, and maximize the tax benefit. For large losses, proper classification and timing can save thousands in taxes.
Frequently Asked Questions
When can I claim a crypto theft loss?
Theft losses are generally deductible in the year the theft is discovered. If you expect partial recovery through bankruptcy or legal proceedings, the deductible loss is reduced by the expected recovery amount.
What is a Section 165 loss for crypto?
Section 165 allows deductions for losses from theft, casualty, or worthlessness. For crypto, this covers exchange hacks, scams, rug pulls, and tokens that have become completely worthless.
Can I claim a loss for worthless crypto?
Yes. If a token has no market value and no reasonable prospect of recovery, you can claim a worthlessness deduction. The loss is treated as a capital loss occurring on the last day of the tax year the asset became worthless.
Get Crypto Tax Help Now
Dealing with ftx bankruptcy tax deduction can feel overwhelming, but there are options. Call the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100 for a free consultation. We have resolved over $100 million in IRS tax debt.