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Crypto Taxes: You Still Owe the IRS Even if Your Lender Collapsed

Voyager Digital encouraged customers to get tax advice.

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Customers of failed crypto lenders such as Celsius Network,
Voyager Digital,
and BlockFi might have an unwelcome surprise this tax season.

Even though their earnings might be locked up in bankruptcy proceedings, the investors likely still owe taxes on much of what their accounts received last year.

The problem is a product of the tax code. A lot of income is considered taxable as soon as it is earned—and the bankruptcy process can take years to play out before creditors know what, exactly, their recoveries will be.

For investors trying to earn interest off their crypto, it was almost impossible to avoid being affected by a bankruptcy this past year. Celsius Network, Voyager Digital, and BlockFi all took deposits of Bitcoin and other tokens from retail investors on the promise of yields that could exceed 10%. They were able to pay such high yields by re-lending the money to institutional investors that could pay even more, or investing the money in riskier trades or in so-called decentralized-finance protocols.

The platforms collected tens of billions of dollars in deposits, even as securities regulators said the products violated the law and didn’t disclose their risks. And then as crypto companies and investors started to implode, the firms, one after the other, halted customer withdrawals and sought bankruptcy protection in 2022.

Each of the firms’ bankruptcy proceedings is still under way, and it is still unclear how much crypto customers might be able to recover.

Customers of crypto exchange FTX US, which filed for bankruptcy protection in November, also will likely need to wait to see how much of their funds they are able to recover before trying to claim a loss on their taxes.

Some bankruptcy experts say it could take years for the cases to play out.

But customers who got paid interest by any of the firms—even if that money is still trapped in a bankruptcy estate—will still likely need to pay income tax on the earnings this year, says Shehan Chandrasekera, head of tax strategy for CoinTracker, a firm that helps investors calculate taxes on crypto investments.

That is because the IRS considers income to be earned when it is paid, regardless of whether those funds ever made it off the platform. For filers to start recognizing losses, the bankruptcy cases would need to be finalized and investors would need to know what exactly their recoveries from the proceeding will be.

“Unfortunately it’s hard for tax purposes to do anything right now because all these bankruptcy filings are pending. Nothing is finalized,” Chandrasekera says.

Gemini, the crypto exchange founded by the Winklevoss twins, recently told customers in an email that it had requested a 30-day extension from the IRS to send its customers the 1099-MISC forms used to report income from its yield-paying product, called Gemini Earn.

While not under bankruptcy protection itself, Gemini Earn had put its customers in loans to Genesis Global, whose lending unit filed for bankruptcy last month. Gemini’s customers haven’t been able to withdraw funds since November. In the letter, Gemini said the delay was related to the Genesis bankruptcy case and investors’ inability to access their assets on the platform.

Separately, the firm on its website warns that it would report income of $600 or more that was available for withdrawal at any point in 2022 “regardless of whether or not it was actually withdrawn by the customer.”

Similarly, Voyager late last year encouraged customers to get tax advice but added that “because your crypto claim has not yet been adjudicated, it is our understanding that you likely cannot use the company’s bankruptcy to claim a loss with respect to any cryptocurrency you deposited on the Voyager platform.”

When the bankruptcies of the various lending firms are finalized, depending on how much of their assets customers get back, they may be able to claim losses on future tax returns, Chandrasekera said. If they end up not getting some of the income they earned last year, some filers might be able to amend their 2022 return to get the taxes back, he said.

In any case, if investors claim those losses on future tax returns, they should be prepared for an audit.

“Even if you get [the tax filing] right and really did lose the money, it might still trigger the IRS to look at your return again,” says Chandrasekera, who said investors should hire a tax professional to help them. “These are strange, infrequent deductions.”

Write to Joe Light at


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