Can I Get a Tax Break When My Crypto Platform Files Bankruptcy?

Over the last couple of years, there has been an increase in people investing in crypto, but with the current market we have also seen what some have called a “crypto winter” in 2022, where crypto prices remained substantially lower than prior peaks and led to widespread losses. Along with this environment, we have also seen some crypto platforms filing for bankruptcy.  

If your crypto holdings were with a platform that has filed bankruptcy, you may be asking, “Can I get a tax break for my crypto losses?” The answer is maybe.

Don’t worry about being a crypto or bankruptcy expert. TurboTax is here for you and can help break down what you need to know if your crypto is involved in a bankruptcy proceedings.

What can I do if my crypto assets are frozen?

If you held crypto at an exchange that is involved in bankruptcy proceedings and your crypto assets are frozen, there may be claims made against the company and a bankruptcy court will eventually determine the distribution of assets if any are available. Typically if an asset could still potentially be recovered, you cannot take a loss on your taxes yet.

While you are waiting to find out if you will recover any of your crypto or whether the crypto will be deemed unrecoverable the best thing you can do is gather your documents related to your crypto account (CSV files, your trades, account balances, etc) to provide proof of the value of your crypto.

Can I get a tax break if my crypto is worthless?

Unlike a sale of crypto that results in capital gain or loss, if your crypto has decreased in value to zero and is no longer being traded on any exchange, you can’t deduct the loss.  When crypto is declared as worthless, it’s treated differently than an investment like worthless stock. Crypto that is deemed completely worthless is an ordinary loss.  An ordinary loss from a worthless or abandoned investment would be treated as a miscellaneous itemized deduction in the year of worthlessness or abandonment; however, under Tax Reform of 2017, miscellaneous itemized deductions are not allowed from 2018 through 2025. 

What tax break can I get if I had a crypto loss not related to bankruptcy proceedings but due to selling the crypto for lower than I bought it for?

If you sold crypto for lower than what you purchased it for, you can offset the losing crypto against your capital gains and offset up to $3,000 of your net loss against ordinary income like wages.  Any additional losses beyond the $3,000 can be carried forward to the next year. Like when selling losing stock investments, offsetting capital losses against capital gains or tax loss harvesting may save you money on your taxes.

Don’t worry about being a crypto or bankruptcy expert. With TurboTax Premium, you can easily import up to 20,000 crypto transactions from your Digital Asset Exchange and Wallet.  TurboTax Premier will help surface and guide you in how you might use any unrealized capital losses you may have from prior years, improving your tax outcome and lowering taxes owed. You can also meet with a TurboTax Expert specializing in crypto, who can prepare, sign, and file your taxes so you can be 100% confident your taxes are done right.