BlockFi Users Can’t Pay Gain Tax After Platform Announces Bankruptcy

Key Takeaways:

  • BlockFi clients owe the IRS for gains they cannot collect.
  • Experts believe they should ask for an extension while the legal dust settles.
  • BlockFi owes billions to over 100,000 creditors, including the SEC.
BlockFi Users Can't Pay Gain Tax After Platform Announces Bankruptcy

YEREVAN (CoinChapter.com) – BlockFi, a platform that attracted millions of investor dollars in 2021, filed for bankruptcy on Nov 28. Meanwhile, as the exchange offered an interest-bearing custodial service, BlokFi traders will still owe taxes from the rewards they can no longer collect.

Taxpayers Can’t Access BlockFi Gains

Andrew Gordon, a tax attorney, certified public accountant, and president of Gordon Law Group, asserted that “gains from earlier in the year are still on the books” despite the BlockFi bankruptcy, further complicating the situation for thousands of taxpayers.

The expert asserted that crypto trading is typically more active when the market increases. Thus, most traders came to high gains at the beginning of the year. However, profits are also possible even when the market drops, depending on when you bought and sold the assets.

Thus, regardless of the initial position, traders still owe the Internal Revenue Service for their rewards.

What Experts Are Saying?

The root of the problem with BlockFi and other bankrupt crypto platforms’ clients is twofold. Firstly, the crypto domain, for better or for worse, lacks rigid regulation. Thus governmental institutions such as the IRS don’t have a solid regiment regarding crypto taxation. Secondly, legal nuances are often up for interpretation in the digital assets segment.

Ryan Losi, executive vice president of CPA firm PIASCIK, agreed that BlockFi customers might owe the IRS more than they plan.

There are different ways it can be treated, depending on the facts of the case. You may be able to claim a capital loss, or bad debt deduction, and write off what you paid for the asset. But it should only be done when that loss is certain.

said Losi.

Thus, the expert’s solution for those customers is filing for a tax extension while they wait for bankruptcy-related legal issues to be resolved. Andrew Gordon backed Losi’s approach.

Just like FTX, we would suggest taking the ‘wait-and-see’ approach because the IRS requires that the loss is certain and in full. We don’t know that, especially at these early stages with BlockFi.

commented the legal expert.

Meanwhile, BlockFi is in deep debt, owing the Securities and Exchange Commission (SEC) $30 million.

BlockFi Bankruptcy and SEC Debt

Reportedly, BlockFi filed for Chapter 11 bankruptcy following the collapse of a fellow crypto exchange FTX. However, Mark Renzi, from BlockFi consultant Berkeley Research Group, stated, “BlockFi looks forward to a transparent process that achieves the best outcome for all clients and other stakeholders.”

Meanwhile, according to the bankruptcy filing, the company had more than 100,000 creditors, with liabilities and assets ranging from $1 billion to $10 billion. As mentioned, $30 million of those assets BlockFi owes to the SEC.

The mentioned debt makes the SEC BlockFi’s fourth-biggest creditor. The largest disclosed creditor is Ankura Trust Company, to which the exchange owes more than $729 million. West Realm Shires Inc. takes second place with $275 million. The third largest debt of $48 million is due to an undisclosed creditor.

Also read: Vladimir Putin Wants Crypto to End Russia’s Sanction Nightmare.

Max Gokhman, chief investment officer at asset manager AlphaTrAI, added that BlockFi’s bankruptcy was unsurprising given its close ties with the imploded FTX.

The only surprise is it took this long, given that when your white knight gets slayed by a dragon of their own making, it’s only a matter of time until you also perish in the fire.

commented Gokhman.

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