The outcome of the SBF prosecution could impact how the IRS treats your FTX loss

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Are your losses to FTX capital losses or theft losses? You’ll likely win, regardless of which classification you choose. Opinion Buy this piece of crypto history Sam Bankman-Fried, founder of NFTFTX, has been charged with criminal offenses following the collapse of the cryptocurrency exchange. This is more than a moral victory for the approximately 1 million investors. Although not yet locked in, it appears that things are on track for these investors to have a more favorable tax position. The United States tax code for 2022 states that assets lost in the FTX crash would be considered a capital gain. Capital gains can be offset by this capital loss. However, investors won’t have capital gains to offset after a year of crypto market turmoil. The loss can be carried forward indefinitely. However, if the loss from the FTX crash was significant, it may take a while before you can claim all of it. A theft-loss deduction can offset ordinary income without any limits. The Internal Revenue Service can be very interested in your claim for a theft loss. It is usually a difficult task. The tax code for theft loss provides a “safe harbor” for Ponzi schemes. The IRS does not require additional documentation if an investor can prove a loss in a Ponzi Scheme. However, the tax code for theft loss contains a “safe harbor” for Ponzi schemes. The safe harbor must be activated by FTX or its “lead person” SBF. This description is in the tax guidance. The SEC specifically mentions “the undisclosed diverting of FTX customers’ funds to Alameda Research.” However, the SEC did not charge SBF with criminal charges. A criminal complaint along with a confession activates Ponzi scheme safe harbour. SBF has been vocal about the FTX collapse but has not indicated that he intends to confess. Investors who have lost assets due to FTX will have time to review the situation. The individual tax-filing deadline is April 18, 2023. SBF and FTX could be subject to additional charges by the SEC, which would clear up any doubts about the Ponzi scheme safe harbour. The IRS could also weigh in on whether the existing charges are sufficient to trigger the safe harbour. Hopefully, 2022 will be the year. Although the theft loss could be claimed in a future tax year, most FTX investors will be keen to recoup their losses by setting aside some money for unexpected taxes. For investors who have lost assets through FTX, it would be foolish to plan on claiming the capital gain at this time. Even if an investor has capital gains that can be offset by 2022, the tax rate for ordinary income is much higher. This only applies to individuals who have no ordinary income, but had capital gains in 2022. If the value that you were able extract from FTX after the collapse is zero, then you can claim the full cost basis of the asset. The IRS considers theft loss to include the total cost basis, but also income taxes paid. These would be taken into account if you had income streams or trades on the exchange and had not withdrawn from the exchange prior to the collapse. This is where your certified public accountant and/or cryptocurrency trading software will be most useful. Some investors may find that the basis is more than the asset’s value when FTX crashed — possibly even more. This may be a silver lining. Investors were expected to wait until 2023 to find out if charges were filed in this matter. However, the SEC seems to have given them a Christmas present. In 2018, he founded the cryptocurrency practice at Fiondella, Milone & LaSaracina. It provides tax and advisory services for Web3 organizations and crypto investors. He mines and trades cryptocurrencies.This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. These views, thoughts, and opinions are solely those of the author and do not necessarily reflect the views or opinions of Cointelegraph.

 

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