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 in this updated guide.
Celsius went into bankruptcy protection on July 13, 2022, leaving many investors eager for updates and a way to get back their investments. On November 9, 2023, the court approved Celsius' plan to restructure, which started rolling out on January 31, 2024. This strategy includes handing out over $3 billion in crypto (BTC and ETH) and cash to Celsius creditors, plus launching a new Bitcoin mining firm named Ionic Digital Incorporated. Celsius investors are set to receive shares in Ionic, with Hut 8 Mining Corp overseeing the mining. While this is a ray of hope for folks looking to reclaim their funds, it's also raising a bunch of questions about the tax side of things.
How much will Celsius refund you?
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.
The value of the assets held with Celsius at the time of the bankruptcy announcement will set the baseline for claim values and how much each creditor gets back. There was also a chance for people to exclude themselves from the collective claim settlement, as noted in Docket No. 4289. Opting out means your claim is marked as disputed, and you won't get any distribution when the plan kicks in. For those who stayed in, the claim value is set at 105% of the initial amount.
Refund rounds
In its recovery distribution plan, Celsius has committed to a total recovery amount of 79.20% of the total claim value. Class 5 creditors, as well as some others, may be refunded in three distinct asset categories.
Liquid crypto (BTC & ETH) - to refund 57.9% of customer funds. This may be in separate BTC and ETH transactions on different dates. If Celsius is unable to provide this due to location and provider limitations, you’ll get this in a cash payout.
Shares in Ionic - to refund 14.9% of customer funds
Distribution from illiquid asset recovery - to refund 14.9% of customer funds (this could take several years, pending litigation proceedings)
The asset distribution plan in detail
The liquid crypto part of your claim will be paid in Bitcoin (BTC) and Ethereum (ETH). If you're a US resident, Venmo and PayPal will handle this, and Coinbase will take care of it for international folks. The amount of BTC and ETH you get is based on the effective date price of BTC and ETH, detailed in the dockets —$42,973 for BTC and $2,577 for ETH.
Example
You have a total claim of $10,000.
57.9% of this will be distributed in BTC and ETH. So the portion of your liquid crypto distribution would be $5,790 ($10,000 x 57.9%).
You'll receive $2,895 of BTC and $2,895 of ETH - or 0.0673 BTC and 1.1228 ETH.
The amount of BTC and ETH will vary and may not always be split equally in half, but will be based on your claim and the price of BTC and ETH as dictated in the effective date price.
The next step in the payout plan involves distributing Ionic's common shares, managed by Odyssey Transfer and Trust Company. Initially, you can't sell or move these shares, but once Ionic is listed on Nasdaq and the registration statement is active, you're free to transfer them to your preferred brokerage account. Ionic's estimated value is around $740 million, setting the share price at $20. To find out how many shares you'll get, take 14.9% of your claim amount and divide it by $20.
Example
Continuing from our example above, your total claim value is $10,000, and 14.9% of your claim will be distributed in shares of the new mining company, Ionic.
So you'll receive shares proportional to 14.9% of your claim, or $1,490 ($10,000 x $14.9%).
The shares will be worth $20 each, so you'll receive 74 or 75 shares (partial shares are not offered).
The last part of the refund rollout involves money from illiquid assets, which are not easy to sell quickly. This could take a while—up to five years—since it's tied to how well ongoing legal cases and other wrap-up tasks go. They're hoping to gather enough from these to cover 6.4% of your total claim.
Finally, in the years to come (depending on the proceedings), you may receive a final payout of 6.4% from illiquid assets.
As your total claim value is $10,000, this would represent $640 ($10,000 x $640).
Remember, your claim's value is pegged to the US dollar value of your assets in your Celsius account as of the date Celsius filed for bankruptcy. This means that despite any price surges in cryptocurrencies like BTC since the 2022 downturn, your claim is not based on the current market value of your stored assets. See a full list of the USD FMV prices for crypto on July 13, 2022, on the last page of this docket. It’s also key to understand that you’ll receive the USD equivalent in BTC, ETH, or USD.
Will you pay tax on your Celsius refund?
If you’re one of the lucky investors who received a partial refund in the initial BTC and ETH refund rounds, you could be in for a nasty tax surprise. Incredibly, your Celsius refund might be taxable! It all depends on what you receive and your cost basis.
If you received the same asset in return, for example, you had BTC in Celsius and only received BTC as a refund, this would not create a taxable event as no asset has been disposed of.
Meanwhile, if you receive a different asset - or assets - as a refund, this may be a disposal and therefore a capital gain or loss must be calculated. As Celsius is paying out initial refunds in only BTC or ETH (or USD where this isn't possible), this is a capital disposal. This event attracts either Capital Gains Tax if you have a gain, or a capital loss, depending on the difference in market value.
In a nutshell: if you received another asset in return for your original crypto, a disposal event may have occurred and you may have a capital gain or loss that you need to report in your tax return. From what we’ve seen so far, many investors are receiving refunds in a mix of BTC and ETH, even where they only held one asset originally.
How to report the recovery refunds in your taxes
For those who waited for the bankruptcy court to decide on the recovery plan, the tax impact will depend on the original cost basis of the asset(s) you had with Celsius. Most Celsius users will not receive in-kind (the same) assets they originally had. Even if you did receive in-kind assets, the treatment would be the same should you opt to dispose of them. In essence, the recovery asset gets the cost basis and holding period of the original assets held in the platform.
Depending on the cost basis and the market value of what you received, you could have an unrealized capital loss or a realized capital gain. Here's how that might look for your taxes.
Loss scenario
You received a total refund of $7,900, made up of 0.0673 BTC and 1.1228 ETH, plus the stock you received, and the illiquid asset payout (based on a claim of $10,000).
But your claim value isn't how you calculate your loss. What matters is the cost basis of the assets you held in Celsius - so how much you originally paid for the cryptocurrencies you had stored in Celsius. In this example, let's say your original cost basis was $12,000.
The value of what you received - $7,900 - is less than your original cost basis of $12,000. This results in a loss of $4,100. Some of this loss may be realized (if you received different assets in return). But for unrealized losses, each portion of your loss would be deductible only when you dispose of your received assets.
Gain scenario
A loss is the most likely scenario from the Celsius bankruptcy refunds - but a gain isn't impossible, particularly for investors who invested in cryptocurrencies early for a low price, but the market value has risen considerably since that point. Let's use the example above, but change our cost basis to explain.
You received a total refund of $7,900, made up of 0.0673 BTC and 1.1228 ETH, plus the stock you received, and the illiquid asset payout (based on a claim of $10,000).
However in this example, your original cost basis - so how much you originally paid for the cryptocurrencies you had stored in Celsius - was $6,000.
The value of what you received - $7,900 - is more than your original cost basis of $6,000. This results in a gain of $1,900. Some of this gain may be realized (if you received different assets in return). But for unrealized gains, each portion of your gain would be taxable only when you dispose of your received assets.
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.
What about tax on potential refunds in the future with Celsius?
Proceedings are still very much ongoing and investors may see more of their funds returned in the coming months, or even years. Under the current recovery plan, it’s predicted that investors may see up to 80% of their funds returned in the future. As such, it’s unlikely that investors can claim losses for any funds not yet refunded.
What about the tax and cost basis for tokens held in Celsius that are transferred into stock?
From a tax perspective, you may be able to claim a loss if you receive stock in exchange for crypto, as from the perspective of the IRS, this is a disposal and if you’ve received a lower USD value in return for your crypto, you may have a loss. However, there are some very niche tax rules around these kinds of events, and as such, it’s highly advisable to speak to a qualified tax professional who can help you navigate the potential tax implications of your new MiningCo stock.
What if I sold my claim to a creditor?
Many investors simply wanted to cut their losses and remove themselves from the pain of lengthy bankruptcy proceedings. As such, some investors opted to sell their claims to creditors for a USD value, and let that creditor make a claim against a platform on their behalf.
From a tax perspective, if you sell your claim to a creditor it may be possible to claim a capital loss since you have disposed of the crypto in the eyes of the IRS in return for (less) USD.
Can you claim a loss from a Chapter 11 bankruptcy?
When it comes to losses in general, the IRS is clear: you can’t claim a loss if your asset is not ‘truly’ lost.
What this means is you can generally only claim losses for assets you've had returned and disposed of, and as refunds are still ongoing, it's not yet entirely clear what your total loss will be. In regards to the crypto you receive as a refund, you may be able to realize a loss from this portion of your refund by disposing of it (if the cost basis for that crypto was lower than the amount you received in return). Similarly, you may in the future be able to realize a loss by disposing of any stock received, and so on.
Under current plans for Celsius customers’, it’s predicted that customers may get up to 80% of their funds back. So while users have only received partial refunds so far, the IRS will see the potential for investors to get back more. Therefore, your assets are not fully lost, and you’d be unable to claim a loss for any unrecovered funds while the restructuring process is ongoing - short of a very specific kind of loss we'll cover below.
However, in relation to any funds returned, you may claim a loss if you dispose of the assets received. For example, if you receive a smaller proportion of the same asset you deposited on Celsius (e.g. Bitcoin), receiving Bitcoin is unlikely to constitute a taxable event (unless the IRS deems this to be income).
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
How large your Celsius loss is
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 2023 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. 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.
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.
Beware of Celsius refund scams
Many users are reporting an influx of phishing emails relating to Celsius refunds. Celsius, and any refund providers, will never contact you by phone, text message, or social media to request personal information. Only you can ensure your personal details are up to date in your Celsius account (until February 28, 2024) and match your details in the account for your refund provider. You should only trust information and emails from the following sources:
celsius.network
stretto.com
cases.stretto.com
celsiusnetwork.medium.com
cases.stretto.com/Celsius
FAQs
Which year can I make a loss claim for Celsius?
For capital losses, you incur a loss in the tax year in which you incur the taxable event or disposal. Losses can be recorded in form 8949 and carried forward or offset against current year taxable gains on property. For Ponzi losses, you incur a 75% loss in the year of discovery only, and a further 25% loss when the proceedings have been completed.
Where will you receive your Celsius refund?
In March 2023, custody customers who qualified were able to start withdrawing BTC, ETH, and USDC from Celsius.
Starting January 31, 2024, other customers who filed claims with Celsius began to receive partial refunds.
Eligible to receive a refund from Celsius? To receive your payout you'll need:
An active Coinbase account
Or an active Paypal account
With matching personal details and email to those on your Celsius account.
Your refund method will depend on your location. In general, these initial distributions of liquid crypto assets will be made by PayPal for those residing in the US (excluding Hawaii), and by Coinbase for those outside the US. Certain countries are an exception to this rule, and these distributions will be made as cash via Stretto.
Can you access your Celsius funds now?
For those who could withdraw from Celsius, you needed to have moved your assets out of Celsius by February 28 2024, as the Celsius app became inaccessible at this point. Celsius had shared these instructions on how to act by February 28.
How to handle Celsius Chapter 11 bankruptcy transactions in your tax return
You’re probably wondering how on earth to deal with Celsius from a tax perspective. There is very little advice available, either from the IRS or Celsius - and given the complexity of the situation, you should speak to an accountant for bespoke advice regarding whether you’re able to claim if you believe you should realize a loss. From a tax perspective, there are several topics that we need to cover:
Are Chapter 11 refunds taxable?
How do you deal with potential future refunds?
What happens if you sell your claim to a creditor?
What are the tax implications for those paid out in stock?
Can you claim a loss from a Chapter 11 bankruptcy?
Does Celsius report to the IRS?
Yes, Celsius reported to the IRS. Any time you received a 1099 form from Celsius, the IRS received an identical copy.
