Are your losses on FTX classified as capital losses or “theft losses” involving a Ponzi scheme? Either way, you have every chance of winning.

FTX founder Sam Bankman-Fried has received a formal criminal complaint following the collapse of his cryptocurrency exchange, which is more than just a moral victory for the nearly 1 million individual investors of the exchange. While it’s not settled yet, things appear to be on track for these investors to take a more favorable tax stance as SBF’s fortunes continue to unravel.

What types of losses can FTX investors claim for tax purposes?
Earlier this fall, it emerged that assets lost in the FTX collapse would be treated as a capital loss under US tax law for the 2022 tax year. This capital loss can be used to offset capital gains. But in a year that has seen the crypto market as a whole falter, most investors won’t have capital gains to offset in 2022.

A capital loss can also be used to offset “ordinary income”, such as B. Money from a business or employment – up to $3,000 per year. The loss will be carried forward indefinitely, but if your loss during the FTX crash was significant, it might take some time to fully claim it.

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A much more favorable scenario for many investors would be to claim a deduction for theft, which can be deducted from ordinary income indefinitely. Claiming a theft loss is usually quite a difficult task which can be checked by the Internal Revenue Service. But the Lost Theft Tax Code includes a “safe haven” for Ponzi schemes. For the most part, if an investor can prove a loss in a Ponzi scheme, the IRS does not require any additional documentation.

Was FTX a Ponzi scheme?
With investors’ assets being illegally diverted to Alameda Research, SBF’s hedge fund, it is likely that the IRS will eventually consider FTX a Ponzi scheme. In order to activate Safe Haven, FTX or its “main figure” SBF must be charged with fraud that fits this description in the tax policy:

“A specific fraudulent arrangement is an arrangement whereby one party (the main character) receives money or property from investors; purports to generate income for investors; declares partially or entirely fictitious amounts of income to investors; the where applicable, making purported income or capital payments to certain investors from amounts invested by other investors in the fraudulent arrangement; and appropriating some or all of the investors’ money or property.

The SEC’s charges against SBF focus on equity investors, not retail investors. However, the SEC specifically mentions “the undisclosed diversion of funds from FTX clients to Alameda Research”. Although it’s not an official green light, it’s very close – closer than we expected in 2022.

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Apart from criminal charges, a criminal charge related to a confession also activates the Ponzi scheme as a safe haven. Although he was very vocal after the collapse of FTX, SBF gave no indication that he planned to confess anything.

What should FTX investors and their tax professionals do?
With the April 18, 2023 personal tax filing deadline, investors who lost assets on FTX have some time to see the impact. It seems very likely that the SEC will file additional charges against SBF or FTX that would remove any doubts about the Pyramid Scheme safe haven.

The IRS could also determine if the existing fees are sufficient to trigger a safe haven, and hopefully 2022 will be the year to adopt it. The theft loss could also be claimed in a future year, but most FTX investors will likely be looking to recoup some of their losses by offsetting their income with their taxes as soon as possible.

Related: Before ETH Falls Further, Set Some Money Aside for Surprise Taxes

For investors who have lost assets on FTX, it would probably be unwise to plan to claim the capital loss at this point. Even if an investor miraculously has capital gains to offset from 2022, the ordinary income tax rate is n

Source: CoinTelegraph