As part of CoinDesk's Tax Week 2023, Miles Fuller, Head of Government Solutions at TaxBit, joins "First Mover" to explain how FTX founder Sam Bankman-Fried's guilty verdict could give some clarity for FTX customers waiting to figure out where they stand in the company's bankruptcy proceedings and the tax treatment of any losses incurred.
For a lot of people over the past year that lost money on a variety of exchanges, bankruptcy. Uh One of the questions that came up was if they did not get all of their money back, which is not likely that they would, what would that look like in terms of a tax deduction to be able to claim some sort of tax loss for that? And the rules, there are really quirky and they've been even more quirky since 2018. And we have tax overhaul under the Trump administration. And at this point, what needs to happen for someone to be able to claim a loss if they did not recover all of their money on any of these exchanges is they need to have been engaged in an activity for the production of income. That's pretty easy because that generally is just investing. So if you were on one of these exchanges, you likely would qualify as an investor and that part would be out of the way. But the next piece is what becomes really difficult. The taxpayer needs to be able to show that they lost their money due to theft. And so this is where the FTX discussion comes in. It's very difficult for a taxpayer to prove the IRS that the loss was due to theft. They have to go through all of the elements of the crime, so to speak and really show the IRS. However, for FTX now we have SPF conviction. Of course, it's not over yet. We gotta wait for sentencing. There's probably going to be an appeal, but the conviction itself is going to give the taxpayers in the ammunition they need to prove that it was the result of theft. So that is a little bit of a silver lining. It's creating some clarity going forward about how someone might be able to deduct these losses.