The unfolding FTX saga holds significant implications for much of the crypto community. Read on for best practice guidelines on how to prepare.
Following the events last week of speculation that major crypto exchange FTX was trading in the red led many users of the exchange to withdraw assets which forced a freeze on all subsequent withdrawals. News coming in over the weekend has advised the exchange has now filed for Chapter 11 bankruptcy for FTX US and FTX.com due to insolvent trading. This has led the U.S Securities and Exchange Commission (“SEC”) to come in and appoint restructuring specialist John J, Ray III to take over the exchange as CEO whilst the bankruptcy proceedings commence.
The market has identified mysterious transactions from the exchange that suggests foul play by the exchange founders where accusations of syphoning funds from the exchange to another entity Alameda, an entity owned by the late CEO and founder of the major crypto exchange. Alameda a crypto trading firm with a reputation for ‘aggressive’ trading strategies, has led many to speculate that the late CEO had over extended positions requiring external funding with transactions from the exchange to the trading firm supposedly done via ‘backdoor’ software built into the exchange’s accounting system.
The significant ethical misconduct that is apparent by the crypto exchange giant will likely fuel increased regulation in bid to hold those responsible accountable and protect investor interests.
Tax Implications
If you are in the unfortunate position of having your crypto locked in FTX there may be remedies for you in relation to claiming your assets as lost or stolen.
The ATO prescribes (QC 69951) treatment for when crypto assets have become lost or stolen. The ATO allows crypto assets to be written off as a capital loss so long as you can prove the following:
✓The crypto asset is lost, and or
✓You have lost evidence proving ownership, and or
✓You have lost access to your crypto asset/s
Proactive steps you can take to satisfy these requirements:
- Extract full history transaction reports and data files (CSV/Excel)
- Take screenshots to confirm your holdings on the exchange
- Note dates and times of your holdings on the exchange
Frozen Withdrawals
As the market continues to fall, users may consider selling out of their positions but are unable to do so due to the freezing of accounts and other withdrawals. In failing to do so may lead many to suffer significant reductions in the valuation of their portfolios. Our office received a large amount of inquiries into claiming a capital loss during the recent Celsius collapse, and unfortunately there is no current remedy or guidance provided by the ATO which limits us to relying on QC 69951 exclusively to apply capital losses.
Payouts from FTX
Whilst not certain, we suspect impacted customers will be unable to withdraw their assets equal to what they have deposited into the exchange. If there are any monetary or asset payouts to compensate account holders in this situation, the tax implications may vary depending on the situation and therefore it is recommended to seek expert advice.
Other cautionary measures
Until there is tighter regulation of cryptocurrency, it may be a prudent undertaking to consider moving your assets to a cold storage device. This will prevent exchanges from using your assets for other means which may lead to the same outcome as FTX.
Fullstack has a team of seasoned crypto tax specialists, accountants, and bookkeepers to help support you. We offer record keeping solutions, cryptocurrency tax advice and more. Schedule an appointment here to discuss your matter and how we can take it further.
