The catastrophic collapse of FTX US and FTX.com, as well as FTX Group companies like BlockFi, has left more than 1 million crypto investors exposed and looking for answers. Here's what affected investors need to know now - and do next.
What happened with FTX?
Following an unprecedented turn of events, the Bahamas-based cryptocurrency exchange FTX has filed for bankruptcy, affecting both FTX.COM and FTX.US - as well as other FTX Group companies including BlockFi. The story of what exactly happened is still unfolding, but in brief:
- Binance sold its stake in FTX, selling $2.1 billion of FTT tokens.
- A report from CoinDesk shows the balance sheet of FTX sister company, Alameda Research, had millions of dollars in FTT tokens which were being used as collateral for further loans - raising serious questions over the two companies' financial exposure to FTT.
- Binance responds. CEO, CZ states the company would sell off all FTT holdings.
- Alameda & FTX purchase FTT tokens at $22 to prop up the price and prevent loan liquidations, but cannot keep up enough buy pressure to prop the price up, leading to FTT-backed loans liquidating.
- FTT price plummets by 90%, causing a bank run on FTX as investors flock to withdraw their assets. The bank-run in combination with the over-leveraged balance-sheet of FTX causes an asset-liability mismatch . In layman's terms, FTX didn't have enough coins to return to its customers. This results in a liquidity-crisis for FTX and forces them to shut down withdrawals.
- FTX users report issues withdrawing from the platform.
- FTX CEO, Sam Bankman-Fried, denies rumors of insolvency on November 7 and states FTX is fine.
- FTX halts withdrawals.
- CZ steps in saying Binance may buy FTX pending a due diligence process.
- CZ states the day after Binance will not acquire FTX due to regulatory investigations in the US and other financial issues.
- The FTX Group files for Chapter 11 Bankruptcy. The hole in FTX's balance-sheet seems to be around $9 Billion.
- Other FTX Group owned companies halt withdrawals including BlockFi. Many other crypto companies with significant exposure to FTX or FTT have also faced liquidity issues including Liquid Exchange & Genesis Lending.
Where are we now?
As of mid-November 2022, the situation with FTX US is still unfolding and there’s much uncertainty for investors regarding whether they'll recoup any of their losses.
Anyone with assets held on the FTX or FTX US platform is at this point unable to withdraw their funds while proceedings are on-going. Effectively, anyone who can prove that the exchange owes them money will have to get in line to request repayment. This will be a complex legal situation, as courts may have to decide how to treat individual clients, and where they rank in priority among other creditors.
- FTX has currently filed for Chapter 11 Bankruptcy
While this sounds like bad news, it means customers with assets on FTX and FTX US may still see (some) funds returned. Unfortunately, this could take years - similar to the Mt. Gox proceedings.
- Currently, FTX US funds are frozen and withdrawals are halted.
This means from a tax perspective there is nothing you can do to realize your loss. Your funds may still be recovered in the future, so you cannot deduct any losses.
- The legal outcome is in flux
We're waiting to see how the US Courts will act, which in turn will influence the options for US investors in terms of pursuing their losses, and, attempting to claim a tax loss with the IRS.
How do I get my crypto back from FTX?
The short answer is, no one knows yet. This is a developing story, but the odds that investors will recoup lost - or stolen - crypto from FTX and FTX.US looks unlikely.
Ok, can I claim my FTX loss at tax time?
If you don't receive any funds back from proceedings, can you at least claim losses from FTX or FTX.US to offset gains at tax time?
Hopefully, but it depends. If the courts find that the FTX meltdown is due to a hack or crime perpetrated against FTX, investors will have no leg to stand on. Currently, the IRS does not recognize the theft of crypto as a capital loss.
If we're not dealing with a hack, then potentially, depending on court findings, investors may be able to claim a worthless investment loss in the future and offset this against any other capital gains. But this could take years.
What should I do right now?
At the moment, the best thing investors can do is get all the transaction data they can from FTX US as proof of their losses for the future. How can you do this? Well you'd start by downloading your transaction records from FTX - if only this were possible. With the site down, this option is no longer available. You can find out more information about obtaining transaction records from FTX or FTX.US here.
Did you connect FTX to your crypto tax calculator?
Crypto investors use apps like Koinly to act as a third party record keeping service for all their crypto transactions. If you have previously connected FTX to Koinly then your records are in safe hands. Records imported up to 13 November approximately are securely stored in your Koinly account - ready for you to use when it comes to reporting your losses at tax time. Learn more about your options to use Koinly for recording keeping and FTX tax reporting.
Did you send funds to FTX from another exchange or platform?
Act fast to download all statements related to FTX transactions from any exchange or wallet you may have previously used.
- FTX & FTX US have collapsed. Investors cannot access their funds.
- FTX faced a hack in the region of $600 million following the collapse.
- FTX has filed Chapter 11 Bankruptcy.
- Investors must wait to see whether they can recoup their losses.
- Investors should export CSV files of their FTX data to prove losses in the future.