The recent bankruptcy of several cryptocurrency platforms, including Celsius and FTX, has raised questions about how the IRS tax code applies to these unique situations.
The tax code generally permits claiming deductions or losses once the loss is complete and known. However, for these bankruptcy proceedings, you must still satisfy both criteria.
Uncertainty of Celsius and FTX Losses
One of the critical challenges investors face in cryptocurrency platform bankruptcies is the uncertainty surrounding the extent of their losses.
Many of these platforms are still in the early stages of bankruptcy proceedings, and some have claimed they have plans to return all funds to their holders.
Partial Recovery of Celsius and FTX Losses
In addition to the uncertainty surrounding the extent of the loss, a partial recovery is possible as part of the bankruptcy proceedings.
As a result, it is too soon to determine the full extent of the loss, and investors must wait and see how the bankruptcy unfolds before claiming any losses.
Filing for a Tax Extension
Further guidance from the IRS may become available in the future, as was seen during the Madoff Ponzi scheme when the IRS issued specific guidance on the subject.
If you were a holder of Celsius, FTX, BlockFi, or any other affected platforms. It may make sense to file for an extension and consult a tax lawyer to weigh the pros and cons.
Filing too early without clarity from the bankruptcy court and the IRS may result in taking a position you may regret later.
Avoiding Penalties and Interest
It is important to note that an extension to file differs from an extension to pay. The payment due date in April remains the same, even if you extend your filing due date.
Make an estimated payment based on what you think will be owed to avoid IRS tax penalties and interest. Then, adjust the payment once you file your tax return.
Need Help Avoiding the IRS? We Can Help!
The current bankruptcy of cryptocurrency platforms has created a complex tax situation that requires careful consideration and expert guidance.
By waiting for clarity, filing for an extension, and consulting an experienced tax attorney, you can minimize potential penalties and interest and make informed decisions about your tax liability.