This post has been republished from the LexDAOism Substack.
If you were one of the unlucky ones to have your funds on Celsius when they “paused” withdrawals, you’ve likely experienced a wide range of emotions: disbelief, rage, quiet, tearful acceptance. Now, you may be starting to wonder about the tax implications of having your funds frozen. Can you write those funds off as losses? What if Celsius repays you? What are those 87,000 new IRS agents going to be used for?
Celsius froze withdrawals from their platform on June 12, 2022. Between then and July 13, when Celsius filed for Chapter 11 bankruptcy, nobody really knew what was going on. Celsius’ bankruptcy filings revealed a $2.8 billion hole on Celcius’ balance sheet, which makes it unlikely that everyone will get their money back. With this possibility looming, can you at least write off those losses on your taxes?
Can’t be mostly dead.
Assuming you are an individual (and you didn’t deposit business funds into Celsius), your losses may be considered a nonbusiness bad debt.
To be considered nonbusiness bad debt, your loss must meet certain requirements. Some requirements should be easy to satisfy given the nature of the typical user’s relationship to Celsius. For example, you must have intended your deposit to be a loan to Celsius, not a gift. This one’s a freebie – you may not have thought of your deposit as a loan, but it turns out the Celsius Terms and Conditions state that your funds deposited at Celsius are a loan to Celsius.
That’s where the easy part ends. The next requirement is that the debt is totally worthless. Mostly worthless is not good enough, it must be completely worthless.
So, how do you determine if your debt is completely worthless? The IRS provides “[a] debt becomes worthless when the surrounding facts and circumstances indicate there’s no reasonable expectation that the debt will be repaid.”
Let’s talk facts and circumstances. When looking at Celsius, it’s unclear whether your debt is totally worthless or if you should have a reasonable expectation that the debt will be repaid. If the price of crypto skyrockets will your assets be returned? Will you receive pennies on the dollar for your deposited funds years from now, once the bankruptcy case is resolved?
All we have right now are guesses, but luckily, the IRS provides that the borrower declaring bankruptcy can be grounds for determining that your debt is worthless, and you won’t be alone. Canadian pension fund, Caisse, recently announced that it will be writing off its Celsius investment.
To write off the loss, you must report it as a short-term capital loss on Form 8949, and you must include a statement explaining:
- the amount of the loan made to Celsius and the date it became due;
- the efforts you made to collect the debt; and
- why you decided the debt was worthless.
Talk to your accountant when preparing this form.
BTC topped $60k last year. Can I write off a $60k loss?
You can only write off the cost basis for the funds you held on Celsius. This cost basis is determined at the time you purchased the loaned crypto, not at the time you made the loan to Celsius. If you purchased tokens and immediately deposited them into Celsius, you’re in luck! You can likely determine the cost basis by looking at your deposit history on Celsius. However, if you purchased the loaned crypto long before you deposited it on Celsius, you will have to determine the price you originally paid for the token and use that as your cost basis – even if the token was worth substantially more when you deposited it into Celsius, or when Celsius froze withdrawals.
What is Celsius rises from the dead?
What happens if you write off your loss, and in the future, Celsius returns some or all of your funds? The IRS also answers this question. If you write off your loss this year and Celsius returns part or all of your funds at some point in the future, those funds will likely be treated as income, and you will owe taxes on them as if you had earned that year. Of course, you can’t write off your loss as a bad debt if Celsius returns funds the same year.
Remember that this article is for informational purposes only. Please do not rely on strangers on the internet (including me) for any investment, tax or legal advice.
Reach out to me on Twitter or on spencerks.com if you have comments or just to say hi!
Special thanks to Mark for his help on this one.