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The crypto space has been marred by several platforms and exchanges that went bust in the past few months. In turn, investors have been left frustrated about how to recoup their losses, unlock their frozen assets or how to not get caught up in legalities.
Let’s take a look at how so many people lost their crypto holdings and what recourse they have to get their money back.
The Collapse of Crypto
Of course, the now infamous FTX platform filed — along with its more than 130 subsidiaries — for Chapter 11 on Nov. 14, 2022.
The FTX fallout contagion ensued, and fellow crypto platform BlockFi also filed for bankruptcy on Nov. 28, saying this “follows the shocking events surrounding FTX and associated corporate entities and the difficult but necessary decision we made as a result to pause most activities on our platform.”
In January, another one bit the FTX dust, as the Securities and Exchange Commission (SEC) charged Gemini and Genesis for “the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program.”
“Through this unregistered offering, Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors. Investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing,” the SEC said in a Jan. 12 statement.
Of course, this all came on the heels of the earlier busts of crypto lending platforms Voyager Digital and Celsius, which promised eye-popping yields to their customers — that is until they both filed for bankruptcy in July 2022 due to their exposure to the now infamous Three Arrows Capital, which itself went bankrupt after the implosion of Terra LUNA and its TerraUSD stablecoin.
Who Owns the Crypto?
Now, millions of investors are left seeking answers — and their money.
“Whether the customers of these bankrupt crypto entities will have access to the crypto and cash held on these respective platforms is typically exclusively determined by the governing terms and conditions,” said Richard Mico, U.S. CEO and chief legal officer of Banxa. “The fundamental question in reviewing the terms and conditions is: Who owns the assets held by these platforms?”
Generally, if the assets held by the platforms are owned by the customers, then they will not be the property of the platforms in bankruptcy, Mico explained. The customers should receive their assets back much more quickly.
“If the assets are ‘owned’ by the platforms,” Mico said, “then the customers will typically be nothing more than unsecured creditors — ranking behind secured and other priority creditors in the related bankruptcy process.”
That often means that, after the secured and other priority creditors have been paid, there are insufficient assets for all unsecured creditors to be paid in full.
“Unsecured creditors typically rank equally amongst each other — so the remaining assets are divided evenly amongst them, meaning often they only receive cents on the dollar,” Mico said, noting that the type of bankruptcy selected by any particular platform also can dictate the length of time required for the customer to receive any repayment.
Mico added, “All of these issues are currently being closely considered and examined in the collapses of Celsius, BlockFi and FTX.”
How Bankruptcies Affect Your Taxes
Another factor to bear in mind is that bankruptcy proceedings tend to be very lengthy. While a platform is in bankruptcy proceedings, you can’t take a loss on your taxes. While you are waiting, TurboTax recommends the best thing you can do is gather documents related to your crypto account.
Once the platform’s bankruptcy is settled and the assets are deemed worthless, “You can offset the loss of the crypto based on what you paid for it against your gains and offset any additional loss against ordinary income like wages up to $3,000,” TurboTax says. “Any additional loss over $3,000 can be carried over to the next year.”
All in all, options to recoup losses in such instances are few and far between. Aaron Kaplan, founder and co-CEO of Prometheum, noted that recovery from the FTX and other debacles likely will be quite limited as the costs of bankruptcy will materially reduce the ultimate payments that will be available to customer creditors of these failed institutions.
However, Kaplan added that investors who have other capital gains should consult their tax advisors about writing off their losses from these failed institutions against such capital gains.
“Many class-action lawsuits have been commenced against various participants and or aiders and abettors in the failed institutions activities,” he said. “These class actions will probably add some small return to damaged investors.”
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FAQs
If you held the asset for less than a year, it is considered short-term, and you will pay ordinary income tax rates. If you sell your crypto for a loss, the IRS allows you to offset losses against other income on your tax return. These so-called “realized losses” can be used to offset other taxable investment profits.
How to recover lost crypto funds? ›
Enlist services that specialize in tracking and recovering lost or stolen cryptocurrency. Utilize tools to track the flow of your stolen assets. Change passwords and employ security features like two-factor authentication on your accounts. Keep an eye on wallet addresses and act quickly if funds move.
How do I claim lost crypto? ›
Tax savings by claiming crypto losses
In order to claim a loss, you will need to have made a crypto taxable event on the asset. This means selling, trading for another crypto, or spending crypto. Otherwise, the loss remains unrealized and cannot be reported as a capital loss.
Do I need to file taxes for crypto if I lost money? ›
Yes, according to the IRS, investors in the US have to report all of their gains and losses each tax year on the appropriate crypto tax forms, including Schedule D and Form 8949 on their Form 1040.
Can you get your money back crypto? ›
Understand that if a cryptocurrency investment seems too good to be true, it probably is. Be aware that you will not be able to reverse a cryptocurrency transaction and get your money back.
Do you owe money if your crypto goes negative? ›
Despite the risks involved, shorting crypto has advantages, making it a high-risk, high-reward strategy. So, answering if a crypto goes negative, do you owe money? You may have to pay the buyer to sell if the crypto value goes negative when you sell off the bought cryptocurrency.
How do I claim back crypto losses? ›
Only realised losses, where you've sold the cryptocurrency at a lower price than what you paid, can be claimed for tax purposes. Unrealised losses, where the market value has dropped but you haven't sold, cannot be claimed.
What is the best crypto recovery service? ›
Legitimate services prioritize customer security, offer transparent processes, and provide clear communication throughout the recovery process. To avoid ever needing this type of service, though, it's important to stick to reputable crypto service providers like Kraken, Binance, and Ledger.
Has anyone recovered stolen crypto? ›
Several high-profile cases demonstrate the effectiveness of blockchain analysis in recovering stolen cryptocurrency.
How do I report crypto losses to the IRS? ›
You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.
For tax years 2018 through 2025, you can no longer claim casualty and theft losses on personal property as itemized deductions, unless your claim is caused by a federally declared disaster. You will still use Form 4684 to figure your losses and report them on Form 1040, Schedule A.
How much crypto losses can you write off? ›
This means that when you realize losses after trading, selling, or otherwise disposing of your crypto, your losses offset your capital gains and up to $3,000 of personal income. Any net losses exceeding $3,000 in a given year can be rolled forward into future tax years.
What is the tax treatment of lost crypto? ›
Generally, when there is a loss or theft of crypto assets you would report this as a capital loss and carry that loss forward. This loss would need to be reported in the year it happened and then would be able to be carried forward to cover any capital gains you get in the future.
Can you cash out crypto without paying taxes? ›
There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.
Can crypto currency losses be deducted? ›
Only realised losses, where you've sold the cryptocurrency at a lower price than what you paid, can be claimed for tax purposes. Unrealised losses, where the market value has dropped but you haven't sold, cannot be claimed.
How do you make money when crypto goes down? ›
Short selling, or betting that an asset's value will fall, is also a strategy to potentially turn a profit during dips. Activities like staking and DeFi yield farming can further help level out returns and provide support to make sure your actual crypto balance is always growing, even in a bear market or downtrend.
Do crypto losses carry over? ›
Crypto losses exceeding gains can be carried forward, offering future offset potential. In the U.S., up to 3,000$ of net loss can offset ordinary income annually. Excess over 3,000$ carries forward, e.g., a 10,000$ net loss allows a 3,000$ offset plus a 7,000$ carryforward to future years, used until fully depleted.
Have people lost money in crypto? ›
When things went bad between BlockFi and FTX in October 2021, BlockFi froze everyone's assets — including Clarin's Bitcoin, valued at around $250,000 — and went into Chapter 11 bankruptcy. “It was a horrific moment for our family for sure. My husband was like, what did you do?” she said.
