Celsius Tax Write Offs & Bankruptcy: Complete Guide 2024

Wondering how to do your Celsius taxes now that Celsius is rolling out refunds? Will you have to pay tax on your refund? And can you claim lost assets as a tax write-off?  Find out everything you need to know ahead of your 2024 tax return in this updated guide about the Celsius lawsuit, tax write-offs, and more. Koinly has teamed up with Justin Zanardi, Head CPA at Count On Sheep, to share his approach and shed some light on the complex situation many Celsius investors have found themselves in. 

Tldr; the Celsius lawsuit - what happened?

• Celsius went into bankruptcy protection on July 13, 2022

• On November 9, 2023, the court approved Celsius' plan to restructure

• Refunds started rolling out on January 31, 2024

• Your claim value, refund distributions, and tax impact depend on a number of factors

• The reorganized company is pursuing litigation against founder, Alex Mashinsky

• Mashinsky also faces criminal charges in the US and civil charges in New York for (allegedly) artificially inflating the value of CEL and misleading customers

How much will Celsius refund me?

The size of your partial refund from Celsius can be a bit tricky to pin down because it's influenced by several things. It depends on the details of your individual claim, how much you had stored with Celsius, and which of their products you were using. Three documents issued by the United States Bankruptcy Court will guide you on what to expect:

• Plan of Reorganization: Docket №4289

• The Disclosure Statement: Docket №3332

• Notice of Effective Date: Docket №4298

Essentially creditors are divided into 16 groups, each with specific rights and claim treatments. In this guide, we're zeroing in on Class 5 creditors, which represent individuals in the Earn program with claims over $5,000. This group serves as a good example since the rules for Class 5 generally apply across other classes too.

Celsius claim value

You first need to understand your claim value. This is based on three things:

• The crypto assets lost (type and amount of each)

• The value of your asset(s) at 8:10PM ET on July 13, 2022 (price chart below)

• Whether or not you opted out of the class claim settlement - those who did not specifically opt out receive a 5% markup on their total claim

You can see the value of your asset(s) in the table below:

To calculate your initial claim value, take the amount of each token lost, multiply it by the prices shown in the table above, and add the amounts together. Provided you didn’t specifically opt out of the class claim settlement, you’ll receive a 5% markup on your claim. Multiply your initial claim by 1.05 to calculate your final claim amount. This is the figure used to determine the distribution you’ll receive.

Distribution payouts

In its recovery distribution plan, Celsius has committed to a total recovery amount of 79.2% of the total claim value, paid out as so:

• 28.95% to be paid out in BTC

• 28.95% to be paid out in ETH

• 14.9% to be paid out in Ionic Digital Stock

• 6.4% to be paid out in an unknown asset type (likely cash) from the sale of illiquid assets 

The remaining 20.8% of the total claim value is likely unrecoverable. 

BTC, ETH, and stock distributions have already begun rolling out in 2024, with the effective date set as January 16, 2024. The ratio of BTC and ETH received may vary slightly but will be relatively close to a 50:50 split.  As established in the recovery distribution plan above, the following values as of the effective date must be used in the forced liquidation calculation:

• BTC: $42,972.9948/BTC

• ETH: $2,577.4752/ETH

• Stock: $20.00/share

The remaining 6.4% distribution date(s) has not yet been established, and could potentially span over several years. Lastly, this leaves 20.8% as likely unrecoverable - but this cannot be claimed as a loss until court proceedings are finalized, which, to say the least, could take years.

How do I deal with my Celsius refund in my tax return?

It’s a simple question, but unfortunately, the answer is not due to the multitude of scenarios by which investors are receiving refunds, as well as the different routes investors have to claim a loss.

Given the complexity of the situation, we’ll say upfront that you should absolutely seek the assistance of an experienced crypto accountant like those at Count On Sheep to help you navigate the best way to deal with your Celsius taxes. 

All this said, we’ll cover some of the potential scenarios and routes available to Celsius investors. Starting with the two potential losses investors can claim - a safe harbor ponzi loss or a capital loss.

The Safe Harbor Ponzi Loss allows you to claim 75% of your lost assets' cost basis in 2023, while reserving 25% for future asset recovery, with excess distributions taxed as ordinary income. In contrast, the capital loss route allows for potential losses to be claimed in 2024 and future periods when additional distributions are made. It’s important to note that while the Ponzi Scheme Loss option allows for a simpler calculation and earlier recognition of loss, it comes with a substantially higher audit risk. 

Can I claim a Safe Harbor Ponzi loss for Celsius?

Celsius founder Alex Mashinsky faces seven criminal charges relating to the platform and has been accused by an independent examiner for the bankruptcy court of operating a Ponzi scheme. While proceedings are ongoing, it’s entirely possible that Celsius will be found to be a Ponzi scheme.

This matters for your taxes, because following the Bernie Madoff Ponzi scheme in 2009, the IRS has a specific loss available to taxpayers who fall foul of Ponzi schemes known as a Safe Harbor Ponzi Loss. 

Before we dive any further into this, you should know upfront this is an uncommon type of loss and may increase the risk of an IRS audit.  As well as this, claiming a Ponzi loss may only be beneficial for some investors depending on specific circumstances like:

• Your total annual income in 2023, 2024, and future years

• Your cost basis of lost assets in comparison to your total claim value

• Whether you expect to have large capital gains in the future

• And many more factors…

You should only consider a Safe Harbour Ponzi Loss after speaking with an accountant familiar with your particular financial situation.

Claiming a Celsius Ponzi loss in your tax return

Some investors are electing to add an itemized deduction in the form of a safe harbor Ponzi loss in their 2023 tax return, utilizing a tax deadline extension to do so. This is because the loss must be claimed in the year of discovery (of the scheme), which would be 2023 for Celsius as this is the year the founder was indicted. 

This type of loss allows you to claim 75% of the loss initially, and the remaining 25% once proceedings have come to a close. As well as this, unlike capital losses, these losses aren’t limited in terms of what you can offset them against. So whereas with capital losses you can only offset against capital gains and an additional $3,000 against income each year, with a safe harbor Ponzi loss, you can offset the entirety of your loss against your income in the year in which you make the election. Regarding future refunds, if you make a safe harbor Ponzi loss deduction, any future returns would then be considered taxable income beyond the remaining 25% still reserved. 

It’s important to understand that this type of loss is an itemized deduction - so whether it’s the right option for you is a question for your accountant. Your accountant will need to consider your filing status, whether your loss is larger than the standardized deduction, your potential taxable return from Celsius, and the likelihood of you having capital gains in the future to figure out whether this is the best option for your unique circumstances.

For investors looking to claim this loss, you need to have either already claimed it back on the original tax deadline (April 15) or have applied for a tax deadline extension until October 15.

With Ponzi Scheme losses out the way, let’s cover the more likely route for the majority of Celsius investors - capital losses.

Can I claim a capital loss from Celsius?

Potentially. But it depends on a number of factors - including when taxable events occurred, how you received your refund, the assets that you received back as a refund, and your cost basis on the assets lost. Let’s break it down.

Celsius taxable events

Taxable events in the Celsius bankruptcy occur only when distributions are made or court proceedings finalize and it's confirmed no more distributions will be made. The key taxable events are:

1. The 2024 distributions

2. Future distributions from the sale of illiquid assets

3. Once court proceedings are finalized and confirmed no additional distributions will be made

When Celsius filed for bankruptcy, all assets on the platform were frozen. From a tax perspective, in order to fund the liquid distributions (ETH, BTC, and stock), these assets were sold on the effective date (forced liquidation), triggering a taxable event. Accordingly, investors will have a resulting gain or loss triggered. 

Cost basis

To calculate your losses on Celsius, you need to determine the cost basis of the assets you lost, which is their original value when you acquired them plus any associated transaction fees. Unfortunately, it is impossible to perform this calculation without the detailed cost basis tax lots for each crypto asset lost. In order to obtain this data, first load all of your crypto wallets and exchange data into Koinly, and ensure everything is complete and accurate. Then, on any date after your last Celsius transaction, simulate disposing of all your lost assets by creating temporary “send”  transactions, which will reveal their cost basis. Record the total cost basis for each asset lost as this will be used to determine your capital loss or gain on the distributions.

Maximum loss

Before discussing the nuances of timing, it's important to understand the concept of your maximum loss. Your maximum loss is equal to the cost basis of the assets lost as calculated above. However, your claimable loss is reduced by any distributions received. The formula is simple:

Maximum Loss - Fair Value of All Distributions = Total Claimable Loss. 

For example, if your maximum loss is $500 and you receive $200 in distributions, your claimable loss is $300. If you receive more than the original value of lost assets, you'd end up with a gain instead. 

While the above formula for total claimable loss is straightforward, the loss calculated cannot all be recognized at once and the timing of when to recognize these losses is fairly nuanced. Later on, we will discuss in depth when to recognize losses and the amount of loss to recognize.

Like-kind vs. non-like-kind distributions

For users who held BTC and/or ETH on Celsius, receiving the same asset as a distribution isn’t taxable, but rather the cost basis carries into the returned BTC and/or ETH. However, if you receive more BTC and/or ETH than you initially lost, this will trigger a taxable event and require a calculation to be made for the additional amount received. Additionally, if you lost less BTC and/or ETH than you received in distributions, you’ll need to identify the specific cost basis for the returned assets and allocate the remaining cost basis across other categories for forced liquidation. 

For any BTC and/or ETH received in excess of what was lost, in addition to all other crypto assets lost, a forced liquidation will occur. Since these assets are different from what is being received in the distributions, they are not like-kind distributions. 

Returned vs. new BTC and ETH

Users who held BTC and/or ETH will also receive BTC and ETH as part of their distribution. As mentioned above, these are like-kind distributions and are not taxable. Instead, the cost basis of the initial BTC and/or ETH carries over into the returned amounts. Any additional BTC and/or ETH received in excess of what was lost is considered “new”. 

For example, if you lost 3 ETH and received 1 ETH in the 2024 distribution, you have 1 “returned” ETH and 0 “new” ETH. On the contrary, if you only lost 1 ETH but received 3 ETH in the 2024 distributions, you have 1 “returned” ETH and 2 “new” ETH. If you did not lose any BTC and/or ETH, then the full amount received will be considered “new”.

This distinction will be important for the capital gain/loss calculation. 

Categories for cost basis allocation

Your cost basis will need to be allocated among seven different categories. The categories are as follows:

1. “Returned” BTC

2. “New” BTC

3. “Returned” ETH

4. “New” ETH

5. Ionic digital asset stock

6. Illiquid asset recovery

7. Likely unrecoverable

In order to determine how much cost basis to allocate to each category, a fairly complex calculation must be performed. The calculation is outlined below. 

How to calculate your gain or loss from Celsius

Given the many complications we’ve already highlighted in this article, calculating your gain or loss from Celsius is best left to your crypto accountant to ensure it is done accurately and puts you in the best stead for future tax liabilities from Celsius. But for those determined to tackle it themselves, the steps are as follows:

1. Determine your total cost basis: As mentioned in the “Cost basis” section above, the first step requires you to identify the detailed cost basis of assets lost on Celsius. This may require you to simulate temporary sales of all assets stuck on Celsius on any date after your last Celsius transaction. This will allow you to identify the cost basis of each asset lost on Celsius. 

2. Identify “returned” BTC and ETH vs. “new” BTC and ETH: Determine how much of the BTC and/or ETH received in the 2024 distributions should be considered as “returned” by comparing to the BTC and/or ETH you initially lost. Any additional amount of BTC and ETH received in excess of what was lost should be classified as “new”.

3. Assign cost basis for “returned” assets: For “returned” BTC and ETH, assign the cost basis of the BTC and/or ETH initially lost to the amount returned. If the “returned” amount is less than what was initially lost, only assign the cost basis for the amount returned. 

For example, if you lost 3 ETH and received 1 ETH in the 2024 distribution, only the cost basis for 1 of the 3 ETH initially lost can be assigned to the returned ETH. This may require simulating a sale to isolate the cost basis for just the amount returned.

Subtract the cost basis allocated to the returned assets from the total cost basis calculated in step one. The remaining cost basis will be allocated to the other five categories outlined above.

4. Determine starting percentages for allocation: The starting percentages can be calculated as follows:

• “New” BTC starting percentage = (“new” amount of BTC received / total amount of BTC received) x 28.95%

• “New” ETH starting percentage = (“new” amount of ETH received / total amount of ETH received) x 28.95%

• Ionic Digital stock starting percentage = 14.9%

• Illiquid asset recovery starting percentage = 6.4%

• Likely unrecoverable starting percentage = 20.8

In order to allocate the remaining cost basis, we first must proportionally weight the above categories.

5. Determine final percentages for allocation: The final percentages for allocation can be calculated as follows:

• Sum the starting percentages calculated in step 4 to determine your “total starting percentage” (these won’t sum to 100% unless you did not hold any BTC or ETH) 

• For each category outlined in step 4, divide the starting percentages by the total starting percentage to determine your final percentage for each category

These are the final percentages to be used to allocate the remaining cost basis.

6. Allocate remaining cost basis: To allocate the remaining cost basis across the remaining five categories, take the final percentages calculated for each category from step 5 and multiply them by the remaining cost basis calculated in step 3. This is the cost basis assigned to each of the remaining categories and will be used in determining your capital gain or loss on distributions.

7. Calculate your gain/loss: For the 2024 distributions, calculate the fair value of new BTC, new ETH and stock received, by using the values on the effective date, as outlined in the “Distribution payouts” section above. The “returned” BTC and/or ETH should not be included in the calculation. Subtract out the cost basis allocated to each of the new BTC, new ETH, and stock categories. 

In the event the fair value of the distribution received is more than the cost basis allocated to that category, a capital gain must be realized. If the fair value of the distribution received is less than the cost basis allocated to that category, a capital loss is realized. 

8. Future distributions: The cost basis assigned to future distributions (illiquid assets or unrecoverable amounts) must be reserved for use once additional distributions are made and/or court proceedings finalize and it is determined no more distributions will be made. Once court proceedings are finalized, any remaining cost basis reserved can be written off as a capital loss. 

How to handle Chapter 11 refunds in Koinly

If you’ve received a partial refund in crypto from any of the platforms mentioned and you’re wondering how to deal with them in Koinly, you’ve got several options available to you. The right method will depend on how you and your accountant are choosing to deal with your refund and how you were refunded.

We have a dedicated help guide on how to deal with Chapter 11 bankruptcy transactions in Koinly which covers a variety of options you can discuss with your accountant - but for Celsius users in the meantime, one of the most important things you can do is to ensure your Celsius transaction history is imported.

Read next: Find a crypto tax accountant near you