Learn how to establish a trust for your digital assets and cryptocurrency investments. This comprehensive guide covers everything you need to know.
Are Tax Write-Offs Possible for Crypto Losses with Celsius and Voyager?
The bankruptcies of two major cryptocurrency lending platforms, Celsius and Voyager, sent shockwaves through the crypto community in 2022. As the companies froze withdrawals and filed for Chapter 11 bankruptcy protection, hundreds of thousands of retail investors were left unable to access their funds and facing potentially significant losses.
Naturally, many affected users now wonder – can I write off these losses on my taxes? Will the IRS let me deduct these massive crypto losses on my tax return?
The short answer is yes, you can claim capital losses for cryptocurrency held on Celsius and Voyager on your tax return. Much like losses from stocks, bonds, and other capital assets, crypto losses can be used to offset capital gains and lower your overall tax bill.
However, properly documenting and reporting losses involves important nuances given the complex nature of cryptocurrency taxation. In this comprehensive guide, we’ll explore everything you need to know about writing off Celsius, Voyager, and other crypto losses this tax season.
Before digging into tax deductions, let’s quickly recap what happened with Celsius and Voyager for context.
Celsius marketed itself as a next-generation financial platform, offering interest-earning opportunities for crypto asset holders on everything from Bitcoin to stablecoins like USDC. Voyager offered similar high-interest rate accounts.
But when crypto markets crashed in mid-2022, highly speculative activities like crypto lending couldn’t weather the storm. Both Celsius and Voyager froze customer withdrawals in June 2022 citing extreme market volatility.
Weeks later, Voyager filed for bankruptcy – wiping out users’ account balances in the process. Celsius entered bankruptcy proceedings in July as well after failing to raise emergency funds.
Hundreds of thousands of retail crypto investors lost access to their holdings essentially overnight. Unlike stocks held at a brokerage, bankrupt crypto lending platforms don’t offer protections like SIPC insurance.
For tax purposes, both Celsius and Voyager later sent customers 1099 tax forms reflecting $0 balances – essentially saying customer crypto held on their platforms now had a worthless cost basis.
This sets the stage for claiming potentially substantial capital losses on users’ tax returns.
But how exactly does reporting losses work in crypto compared to traditional investments like stocks? Let’s explore the nuances.
Claiming Crypto Capital Losses on Your Tax Return
Cryptocurrencies like Bitcoin have unique tax treatment – they’re treated as property rather than currency or securities in the US tax code.
The IRS first issued guidance back in 2014 making clear that crypto should be treated as property for tax purposes. This means capital gains and losses rules that apply to other forms of property like stocks also apply to crypto holdings.
With that in mind, let’s walk through specifics on how crypto losses can be claimed.
Are Crypto Losses From Celsius & Voyager Tax Deductible?
To start, Celsius and Voyager customers clearly experienced major capital losses amidst the platforms’ bankruptcies. But do these unusable, inaccessible crypto holdings now qualify as deductible capital losses?
Yes – the IRS code section on deducting capital losses makes no distinction between cryptocurrency held at a bankrupt lending platform versus stocks held at bankrupt brokerage.
Losses from securities becoming wholly worthless trigger recognition of the loss for tax purposes. Formal bankruptcy filings provide clear verification that assets held on lending platforms like Celsius and Voyager became 100% worthless amidst bankruptcy.
As the IRS states:
“If your capital asset becomes worthless, you usually can take a deduction for a loss in the tax year that the worthlessness occurs”.
So crypto losses mirroring stock losses in terms of deductibility makes sense – because both are forms of property in the eyes of tax regulations.
With this foundation set, let’s explore logistics on how to actually take deductions.
What Records Do You Need To Claim Losses?
Well-maintained records prove essential when claiming any type of tax deductions – and crypto losses are no exception.
The IRS treats crypto holdings on centralized lending platforms as sales or exchanges of virtual currency for tax purposes when they lose all value.
To properly document these losses on your taxes, you’ll need records showing:
- Original acquisition dates & cost basis: Date and dollar amount paid to acquire the specific crypto holdings lost
- Account statements: Backup statements from Celsius or Voyager accounts verifying holdings
- Bankruptcy filings: Additional proof that lending platforms declaring bankruptcy caused holdings to become 100% worthless
Comprehensive records help verify exact cost basis and acquisition dates in case of any IRS inquiry into large, unusual capital loss claims.
How To Calculate The Amount of Capital Losses
Armed with backup statements and details on original crypto purchase transactions, tallying up total capital losses becomes feasible.
Here are the step-by-step calculations:
- Identify specific crypto holdings lost: for example, 50 ETH held on Celsius along with 10 BTC
- Look up historical cost basis per coin: if 25 ETH was acquired at $1,200 per coin and 25 ETH at $2,500 per coin, use these per unit costs
- Multiply number of coins lost by cost basis: 25 lost ETH x $1,200 cost basis = $30,000. Plus 25 ETH x $2,500 = $62,500
- Sum losses across all holdings: Total cost basis for 50 ETH = $92,500
- Compare cost basis to $0 value after bankruptcy: $92,500 minus $0 current value = $92,500 capital loss
Repeat for all crypto holdings across Celsius, Voyager, and other lending platforms that may have collapsed.
Documenting on a spreadsheet helps efficiently track cost basis details on multiple lost crypto investments.
Using Capital Losses To Offset Gains and Lower Taxes
Claiming losses offers more than just the psychological benefit of reporting your Celsius or Voyager-related tax nightmare to the IRS.
Capital losses provide meaningful financial offsets reducing your tax burden. Some key mechanisms:
- Offsetting capital gains: Capital losses balance out capital gains dollar-for-dollar on your tax return, lowering total gain amounts subject to tax
- Applying against ordinary income: You can apply $3,000 in total net capital losses per year to lower ordinary income like wages or self-employment profits
- Carrying losses forward: Remaining unused capital losses after the $3k deduction can be carried forward indefinitely to offset future capital gains or ordinary income
Given extreme losses from crypto lending catastrophes in the hundreds of thousands or millions, carrying forward deductions for years likely proves necessary.
But this long-term benefit remains very valuable – especially sitting on other crypto gains with Bitcoin rebounds or from crypto staking rewards still in need of offsetting.
Claiming Losses on Your Tax Return Forms
After tallying crypto lending losses in detail, the mechanics of reporting deductions on your 1040 return boil down to a few key forms:
IRS Form 8949 – Reporting Capital Gains & Losses
The main form for communicating all capital gains and losses made during the tax year goes to Form 8949.
Every single crypto transaction associated with Celsius, Voyager or other lending platforms gets reported here – from original acquisition to the culminating worthless bankruptcy “sale” triggering full capital losses.
Pages upon pages of Form 8949 itemized entries often prove necessary given frequent crypto buying, selling, trading, staking, liquidity pooling and more.
IRS guidance also calls for filling out a separate 8949 page per crypto type at minimum – one for Bitcoin holdings, another for Ethereum, etc.
Schedule D – Summary of Capital Gains & Losses
Finally, Schedule D serves as the summary reconciliation of all capital gains and losses spanning Form 8949 pages down to one net amount.
Schedule D carries forward this net gain or loss amount to plug into the 1040 tax return, impacting adjusted gross income.
If showing a net loss, then the $3k deduction against ordinary income emerges here as well.
So in short – do the detailed capital loss legwork on 8949, with Schedule D as the high-level transmitter onto your core tax forms.
Conclusion: Next Steps On Claiming Crypto Losses
2022 will go down as a dark year for crypto lending amidst Celsius, Voyager and likely more lending platform collapses still to come. Retail investors paying the price certainly feel crypto’s uniquely volatile, largely unregulated status in full force.
But amidst catastrophic losses, glimmers of light emerge thanks to the same capital gains and losses tax guidance applying to crypto as to stocks.
Meticulously documenting original and cost basis and final $0 worthless bankruptcy valuations unlocks deducting potentially life-changing amounts of losses on your taxes for years to come.
Just be sure to maintain comprehensive documentation and consider consulting a tax professional to ensure smoothly navigating crypto-specific reporting across Form 8949 and Schedule D.
The tax return allows no opportunity to wave away the pain of this year’s lending implosions. But tax loss harvesting at least offers a silver lining of financial offsets during this industry’s darkest period to date.