The returns of up to 20% annually on customer deposits were offered by the platforms. The plunging token prices are forcing platforms to temporarily suspend or limit withdrawals.
In the wake of its own solvency crisis, Celsius has had customer funds on ice for more than three weeks and has yet to announce guidance on next steps. If the platforms go belly up, who will hold the bag?
There aren't formal consumer protections in place to safeguard user funds when things go wrong on finance platforms The motto is 'high risk, high reward'. There is no recourse for the people who lost their life savings to these platforms.
Shehan Chandrasekera, a certified public accountant, told CNBC that the U.S. tax code may provide some relief to these investors.
If your funds become worthless and irrecoverable, you may be able to write them off as a non business bad debt on your taxes.
It won't cover up your entire economic loss, but it will give you some type of tax benefit, because at least you get to write off that initial investment that you put in
A bad debt that has been extended to another party has been rendered worthless and irrecoverable.
The platform must have lost all of its assets in order for the debt to be deductible. A partial loss doesn't count. A total loss is not constituted by the freezing of accounts.
At this stage, many of the platforms are still calling the freezes temporary as they figure out how to shore up some of their cash flow.
After all attempts at collection have failed, a debt is considered to be " totally uncollectible". None of the funds at these platforms are worthless.
If the debt is discharged, the deduction is deemed worthless.
Even if a platform declares bankruptcy, the holders may still get something in the court of public opinion. It is not known if users will be able to recover some of their losses through the Chapter 11 process.
It can be difficult to determine if the cash you give to a platform is a loan. Coins and stocks are not considered to be non-debt instruments and therefore do not qualify for this writeoff.
A debtor-creditor relationship is needed in order to have a nonbusiness bad debt. The director of tax services at one of the largest public accounting firms in Florida said that the criteria was met if the coin was lent.
It's time to take the temperature. The platform's terms and conditions state that any digital asset transferred to it is a loan from the user to Celsius.
Some platforms are more transparent than others. The relationship that the user has with the platform may have been left vague because they don't want to get into it with the SEC.
CPAs advise those impacted by platform suspensions to reach out to a financial advisor.
To find out what type of relationship you have, you have to talk to an advisor. Does it smell like debt or is it?
If you earn something like a reward, you could argue that it's an interest income. You have to see what type of relationship you have with the platform by going one by one.
An individual can report the initial value of thecryptocurrencies when they were first lent to the platform as a short-term capital loss.
The case of a hypothetical investor named Dan, who paid $10,000 for a piece of the digital currency in 2020. Dan lent that same coin to a platform that gave him 15% of its value as a reward. Dan's debt was rendered worthless when the platform went belly up. Dan could claim his basis of $10,000 as a nonbusiness bad debt.
Capital loss limitations include the fact that non business bad debt is always considered a short term capital loss.
If Dan doesn't have any other capital gains lined up for this tax year, Chandrasekera says that he can deduct $3,000 and carry forward the balance of his bad debt.
Form 8949 is used to deduct the mechanics of reporting non business bad debt. Users also file their gains and losses there.
You have to attach a "bad debt statement" to the return to explain why you decided the debt was worthless.
If you later recover or collect some of the bad debt you have deducted, you may have to include it in your income.
To the extent that there are potential losses on actual holdings, he is advising clients to take advantage of the fact that wash sale rules don't apply to crypt He told CNBC that investors should be looking at their portfolio to see if they can harvest losses to offset capital gains.
Losses on digital currency holdings are different from losses on stocks and mutual funds because they are classified as property by the IRS. The wash sale rules don't apply, meaning that if you want to sell yourbitcoin, you can do it right away.
It paves the way for tax-loss harvesting when it comes to the tax code.
One way to make money is to sell at a loss and buy back the digital currency at a cheaper price. You want to make yourself look bad.
The more losses you can rack up, the better for the investor.
It's possible to harvest an unlimited amount of losses and carry them forward into tax years.
The wash sale rule doesn't apply so investors can harvest their losses more aggressively.
He said that he sees people doing this every month, every week, every quarter. It's possible to collect many of these losses.
Accruing these losses is how investors make up the difference.
The capital gains tax can be used to bring down the amount of money an individual owes the IRS.
A key part of the equation is to quickly buy back the currency. Buying the dip at the right time will allow investors to catch the ride back up.
Let's say a taxpayer buys onebitcoin and sells it for $50,000. The individual would have to pay taxes on their capital gains. They would be able to offset the tax they owe if they had previously lost $40,000 on earlier transactions.
The strategy is catching on among users of the coin tracker.
He warned that thorough bookkeeping is important.
If you don't have detailed records of your transaction and cost basis, you can't tell the IRS what you're doing.
The latest victim of the winter is the price of digital currency.
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