Genesis, BlockFi, Core Scientific, FTX, Celsius, Voyager, Vauld and other cryptocurrency earning platforms and exchanges all had to freeze withdrawals and declare bankruptcy in 2022. It was a rough year for those of us who had been enjoying earning interest on our crypto.
The crypto earning platforms implosion
The first sign of trouble started with the collapse of Terra/Luna/UST. When the crypto community witnessed the rush to withdrawal from that platform, they were primed to be watchful for hints of trouble in other platforms. UST’s collapse contributed to the failure of Three Arrows, which led to the collapse of Voyager, Celsius, and Vauld as these platforms had a combination of reduced funds and a bank run as panicked investors tried to withdraw their funds en masse. BlockFi survived that round thanks to an injection of support from FTX. But then when Binance posted rumors about FTX, that led to a bank run on FTX, which brought down BlockFi, and later contributed to issues at Genesis and then Gemini as well.
What a disaster it was. Earning interest on these platforms was great while it lasted, and it might have continued to this day if such an extraordinary chain of events hadn’t unexpectedly decimated crypto earning platforms in 2022.
Where things stand currently
As of now in the spring of 2023, so far all the platforms that collapsed are still working through the bankruptcy process. Some platforms such as Voyager and Vauld are perhaps getting close to a plan to distribute their assets to their creditors, hopefully this year. Other platforms such as FTX, Genesis, and BlockFi still have a lot to sort through, and those bankruptcies may not be settled until 2024 or later. So it may be some time until the situation is resolved and those of us who had funds on these platforms can find out how much of our locked up crypto we will actually get back. One exception is Terra/UST (see below).
What tax deductions can I get if I lost coins on these platforms?
Unfortunately, you can’t claim a loss on your taxes yet while these platforms are still going through the bankruptcy process. Until the final settlement amounts are known, you don’t really know how much loss (if any) that you’ll incur. So until that happens, you don’t have a tax loss that you can claim on your return.
One exception is Terra/UST which doesn’t have a bankruptcy process to go through since it’s a decentralized system rather than a centralized company. If you still hold Terra or UST, you can simply sell it on Binance, Kraken, or other platforms that still support it. The value of these tokens is just pennies on the dollar of what it once was, but if you want to exit your position (and claim the loss on your taxes), simply sell your tokens.
Do I still have to report the interest if I didn’t get a 1099?
What makes this extra painful is you still have to pay tax on the earnings you made on these platforms in 2022. This is true even if you never withdrew your earnings before they were locked up due to halted withdrawals. The interest is still considered to have been paid to you if you had access to it at some point in time. So for your 2022 tax return, you’ll need to report that interest gained. If it later is determined that you lost some portion of the crypto to the bankruptcy once that is finalized, then you will get to at least take a deduction for the lost value of your crypto in the year the bankruptcy is eventually finalized.
Some of the platforms such as BlockFi and Celsius will send you a 1099-MISC form reporting a dollar amount for the amount of crypto that you earned for the year. If you received a 1099-MISC, that means they also sent a copy of the form to the IRS, so the IRS knows you had earnings, and they’ll also know if you don’t report those earnings on your tax return. But even if your platform doesn’t send you a 1099, you are still required to report your interest earnings on your tax return.
Finding help with cryptocurrency taxes
Crypto investing and taxes are two challenging areas that require experience and knowledge. If you have cryptocurrency investments, and Tax Modern you would rather not risk doing your own taxes, look for a tax professional (an EA or a CPA) with specific experience with crypto. Tax Modern is located in Austin, Texas, but we serve clients all over the US, and we offer free consultations to answer your questions and see if we’re a good fit to be your tax preparer and advisor. Contact us to set up a free consultation.
