FTX founder Sam Bankman-Fried faces formal criminal charges after his cryptocurrency exchange collapses. Although not yet anchored, it appears that these investors are on track to take a more favorable tax position as SBF’s fate continues to unravel.
What Loss Can FTX Investors Claim Against Taxes?
Earlier this fall, it appeared that the assets lost in the FTX collapse would be considered a capital loss under US tax law for the 2022 tax year. This capital loss can be used to offset capital gains. However, most investors will not be able to make offsetting capital gains in 2022 in a year that has devastated the cryptocurrency market as a whole.
Capital losses can also be used to offset “ordinary income” such as money earned from a business or job. Up to $3,000 per year. Losses carry forward indefinitely, but if the loss in the FTX collapse is large, it can take quite some time to claim it all.
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A far more favorable scenario for many investors is to claim a theft loss deduction. This allows you to offset your regular income indefinitely. Claiming damages for theft is usually a rather difficult task and subject to scrutiny by the Internal Revenue Service. However, the tax law for theft losses includes a Ponzi scheme “safe harbor”. In most cases, the IRS does not require additional documentation once an investor can prove a loss in a Ponzi scheme.
Was FTX a Ponzi scheme?
It seems likely that the IRS will eventually view FTX as a Ponzi scheme, as investors’ assets were illegally diverted to SBF’s hedge fund, Alameda Research. For Safe Harbor to be effective, FTX or its “key person” his SBF would have to be charged with fraud consistent with this description of the tax. guidance:
“Certain fraudulent arrangements are arrangements in which a party (principal) receives cash or property from an investor. The purpose is to generate income for the investor. Report to investors In some cases, make income or principal payments to some investors out of amounts invested in fraudulent arrangements by other investors Part of the cash or assets of investors or I will give you all.”
The charges the SEC has imposed against SBF focus on equity investors, not individual investors. However, the SEC specifically refers to “undisclosed diversion of FTX client funds to Alameda Research.” It’s not officially the green light for Safe Harbor, but it’s a lot closer than we expected in 2022.
Outside of criminal charges, criminal complaints coupled with confessions also activate safe harbors for Ponzi schemes. He’s been very vocal after the fall of FTX, but SBF has not indicated that he plans to confess anything.
What should FTX investors and their tax professionals do?
With the personal tax filing deadline of April 18, 2023, investors who lost their assets on FTX will have time to see how this plays out. It seems very likely that the SEC will make additional charges against his SBF or FTX. This clears suspicions about Safer his Harbor in a Ponzi scheme.
The IRS may also consider whether existing claims are sufficient to trigger a safe harbor, and hopefully 2022 will be the year it takes it. Losses from theft may still be claimed in future years, but most FTX investors will be eager to recoup some of their losses by offsetting their income with taxes as soon as possible.
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For investors who lost their assets on FTX, it would be unwise to claim capital loss at this point. is much higher. The only scenario where this makes sense is if the individual had no recurring income and had a capital gain in 2022.
Basis for comparison
It is important to note that in both of these scenarios (Capital Loss or Ponzi Scheme Safe Harbor), the Allowable Loss Amount is the cost basis of the asset. Assuming zero value was withdrawn from FTX after the collapse, you can claim the full amount you originally paid for the asset.
From an IRS perspective, loss from theft includes not only a total cost-paid basis, but also a kicker on tax-paid income. If you traded on an exchange or had sources of income, recognized these incomes on previous tax returns, and had not withdrawn from the exchange prior to the collapse, when calculating your cost base Consider these to. A chartered accountant or coin trading software would be helpful here.
For some investors, the foundation could be more than the value of the asset when FTX goes up in flames, potentially quite a lot more. That could be a bit of a silver lining here. And while it appeared that investors would have to wait until 2023 to see if they would be indicted for the matter, the SEC seems to have given them an early Christmas present.
Justin Wilcox Partner of Fiondella, Milone & LaSaracina, a Connecticut accounting and advisory firm. He founded the firm’s cryptocurrency practice in 2018, providing tax and advisory services to Web3 organizations and cryptocurrency investors. He mines and trades cryptocurrencies.
This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.