Detailed guide for reporting Celsius, Voyager, and other bankruptcy payouts on taxes.
**Context:** I notice that a lot of people (including tax professionals) have questions on how to report payouts coming from Celsius, Voyager, and other crypto platform bankruptcies. This can get super complex from a tax POV. The answers are not in the tax code either (despite it being over 80K pages). However, I was able to get in touch with an attorney who worked at the IRS chief counsel's office on bankruptcy matters to get to the bottom of this. Here's the summary.
**Background**
Celsius, Voyager, BlockFi, and FTX have filed for Chapter 11 bankruptcy (Reorganization). A reorganization allows a company to stay in business and restructure its obligations to creditors. Account holders (creditors) of these companies are now receiving a portion of the original crypto assets they had in these platforms and/or totally new assets (coins you never had and shares of companies) as a payout.
**Taxation**
The tax code does **not** directly talk about the taxation of bankruptcy payouts. Therefore, we have to figure out taxation based on case law. In simple terms, case law means rules that come from past decisions made by the courts.
At a high level, taxation of these bankruptcy payouts depends on whether you have a gain or loss scenario computed based on the difference between the ***amount realized*** (value of the payout at the time of receipt) and the ***initial cost basis*** of your assets.
* **Loss scenario (common):** Amount realized < initial cost basis of your assets. * **Gain scenario (rare):** Amount realized > initial cost basis of your assets. Let's work on some examples.
**In-kind payouts: Payouts received in the same asset you had in the platform.**
**Loss scenario (common)**
You had 1 BTC in the platform; cost basis = $15. 0.7 BTC received as a payout valued at $12 at the time you receive it.
Since the amount realized ($12) is **less** than your initial cost basis ($15), this is a loss scenario. Therefore, the cost basis of 0.7 BTC received becomes $15 (carryover basis from 1 BTC). 0.7 BTC also gets the date acquired of the original 1 BTC (carryover holding period).
After you receive the payout, there are **no** tax forms for you to file. You just have to transfer the original cost basis and date acquired to the 0.7 BTC received.
**Wait, didn't I lose 0.3 BTC? What happens to that?**
Yes, you did. As explained above, the rules allow you to transfer the old cost basis ($15/1 BTC) to 0.7 BTC received. Now, you hold a **lesser amount** of BTC at a **higher cost basis.** Therefore, when you later sell this 0.7 BTC, you will realize **less** capital gains. This is how you get a tax benefit out of the 0.3 BTC you lost due to the bankruptcy.
In this case, this transaction would be reported on Form 8949 similar to any other crypto sale.
**Gain scenario (rare)**
You had 1 BTC in the platform; cost basis = $10. 0.7 BTC received as a payout valued at $12 at the time you received it. Since the amount realized ($12) is **more** than your initial cost basis ($10), this is a gain scenario. In this case, you have to report a $2 capital gain ($12 - $10) on Form 8949.
**Note:** Generally, it's rare to generate gains out of bankruptcy payouts because you are receiving less of the initial asset. That said, if you had an extremely low-cost basis asset or the same asset you received back has significantly appreciated, you would realize gains despite receiving a lesser amount of the original asset.
**A few other things to remember**
* The same principles above apply if you receive a different asset(s) as a payout (non-in-kind payout). In other words, whether you receive the same or different asset back has **no burden** on the tax implications. **What impacts taxation is whether you have a gain or loss scenario as shown above.** * Celsius payout comes out in BTC, ETH, and shares of a mining company. In this case, you'll have to allocate the cost basis of your original asset(s) to these new assets on a pro-rata basis. This could get complicated. * You will most likely have to do several manual edits on your crypto tax software to get the right tax outcome. Can't speak to all crypto software but CoinTracker does allow you to manually edit cost basis and data acquired to get the desired outcome. Disclaimer: I lead the tax function at CoinTracker. * If you receive stock, you can maintain basis outside of crypto tax software.
**In summary;**
**Step 1:** See if you have a gain or loss scenario based on the difference between the amount realized from the payout and the initial cost basis of the asset(s).
**Step 2:** If loss (most common), transfer your cost basis and date acquired from the original assets(s) you had in the platform to the assets received from the payout. You can use the manual edit feature on your crypto tax software to do this (if allowed).
**Step 3:** If gain (rare, but possible), report the gain on Form 8949 at the time you receive the payout. Gain = payout value - original cost basis of the asset. You can use the manual edit feature on your crypto tax software to do this (if allowed).