FTX Users Can’t Count on Help From the IRS

When market investors suffer losses — or get taken for a ride — they’re often eligible for a tax write-off to soften the blow. Users of the bankrupt crypto exchange FTX won’t be so lucky.

Here’s the difference: Let’s say you’re a crypto investor on an exchange that’s still standing. If you’ve suffered investment losses amid the market decline, you can simply sell to offset other gains and potentially take a deduction. That’s because the Internal Revenue Service allows investors to sell poor-performing crypto, just as with stocks, and use those losses to cancel out capital gains from selling better-performing assets.

If losses exceed gains, investors can deduct up to $3,000 against their taxable income. Losses beyond $3,000 can be carried forward every year until death to offset gains in future years.

But that’s not the case for customers at FTX or any other crypto exchange that blows up. The tax code specifies that if you want to take a capital loss, you must sell or exchange that asset. Losing access to it because the exchange shuts down is different and would most likely be insufficient in court, said Matt Metras, an accountant in Rochester, New York, who represents taxpayers before the IRS.

Another provision in the code allows for a deduction if a security is worthless. No luck there, though — the IRS has said digital currency is considered property, not a security, like a stock. Plus, the asset has to be worthless, as in zero — not close to it.

Then there’s the theft-loss route, but it’s complicated. Before the 2017 Republican tax law, investors who had losses because of theft could deduct them against their ordinary income provided certain criteria were met. Along with a bunch of other miscellaneous itemized deductions, the theft-loss deduction was largely eliminated except for losses tied to a federally declared disaster.