As part of CoinDesk's Tax Week 2023, TaxBit Head of Government Solutions Miles Fuller discusses how the end of FTX founder Sam Bankman-Fried's trial could provide some clarity for FTX customers as to how the company’s bankruptcy might affect their taxes.
Tax filing day may be a ways away. But if you've bought, sold, traded, earned or lost money in crypto this year, you might have some questions. It's tax week here at coin desk where we can hopefully help you answer some of those questions. Our next guest says there might be a silver lining for those who lost money on FTX joining us now to discuss this tax. But head of government solutions Miles full. Welcome to the show Miles. Hey, good morning. Thanks for having me. Good morning to you too. And I got to be honest, when I lose money, there is no silver lining for me. So talk to us about what you mean. You say Sam Baken Fried's conviction solidifies the deductibility of losses sustained by users of FTX under the US. Talk tax law, explain what's going on here. Yeah. And I'd agree, there's never a silver lining, but at least it might mitigate the impact for you uh economically. So for a lot of people over the past year that lost money on a variety of exchanges and enter 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. Ok? But here, here's the problem miles. Uh, as you mentioned before, he can appeal. Uh, the other thing is that it's Saman and Fried was convicted, but at the same time, the company itself, from what I understand it, the company wasn't convicted. The company isn't accused, wasn't found guilty of fraud, so to speak. Yes, an individual that was there. So what do I do if I, if I have money with FTX and I can't get it back or it's gonna be a while before I get it back. And meanwhile, it's locked up in something like Bitcoin. I had Bitcoin there. I can't get it back. Price of Bitcoin has been going up. What do I do? So there's a couple of different things to unpack from your question. So first, generally companies aren't brought up on criminal charges here in the United States. We generally file criminal charges against individuals. So it's important to note at that level, not just SB and free, but remember the rest of the executive team of ftxftx, us and Alameda Research were all charged and all of them pled guilty. Now, most of them pled guilty in advance so they could testify as cooperating witnesses. But those individuals that were the executive officers of those companies or who were found guilty for essentially, I think as we saw the trial testimony, looting the company and moving stuff around and stealing things from customers. I think that alone without the companies specifically being implicated is good enough for a taxpayer to be able to make the claim. Um The next question you kind of had was more about timing and one thing. So in the bankruptcy proceedings, which operate totally independent of the criminal prosecution in there, that the bankruptcy administrators have already put out a draft plan of reorganization. And what that's doing is telling individual creditors what it's likely to look like in terms of what the payout will be. Now, one important point that's come out of that is the payout is not likely to come back to them in crypto, it's going to come back in cash. So they already know that. So there's going to be only getting cash back, not any Bitcoin. Now, the amount of the payout is still yet unknown. Uh The draft plan that came out has not been solidified by the court or passed by the court. There's going to be a vote the way Chapter 11 bankruptcies work, there will be a vote by the impacted creditors uh still going to be some time before that happened. But what they did is sketch out the plan which really takes uh FTX users if you were an FTX dot us user. And if you're an FTX dot com, the offshore exchange, they put them in different buckets and they're gonna start funding the payouts between those as, as between those two different buckets as two different pools of money looks to be the plan. And if you had money in each pool, you may have a claim for each pool, but you'll wait to see. But you're really starting to get clarity around the ability to take the deduction. The question you have Lawrence around what that amount might look like is still yet to come and you're going to have to wait to see what happens there. What, what if, what if Sam Beckman freed is successful in his appeal? And you've already, you've already taken some sort of loss on your taxes based on, on a conviction or a conviction of fraud in the previous year. What happens? You have to give it back? I think that's an interesting question. If it does go up on appeal it, one, I think one question might come up is what's the, what's the appeal about? Like, what's the basis for the appeal? And if the appeal does overturn the conviction, there will be a question there about what the taxpayer might have to do if they did already claim it. There is a chance that if they did claim the deduction and the conviction is overturned on appeal, they would have to basically take the money back in the income that they lost. And so the IRS would probably set up a procedure for that or there would be a procedure you could follow to do that. Uh, I think for most of us after watching the trial, an overturn of the conviction is probably unlikely, especially, and you gotta remember the, he was convicted on seven sev, uh, seven distinct counts. So the appeal would have to probably would overturn all of those counts. I think if you get one of those counts, you're fine as far as claiming the tax deduction. All right, I want to broaden up the conversation. Now, the IRS recently had a legal battle with Kraken centralized exchange and in that legal battle, they noted that the amount of people reporting crypto transactions in the United States falls short of what is expected given the amount of users on centralized exchanges. Why do you think the number of people reporting is so low? Is there a need for more clarity when it comes to tax reporting here? Or do you think they just think like II, I can get away without reporting these transactions for one more year from my experience over the past six or seven years in the space and I I prior to working at tax, but I was a lawyer for the IRS that worked on some of these issues. I I think what I've learned over the years is there are definitely a subset but a relatively small subset of people that are looking to not report taxes for what I'm going to call nefarious reasons because they're trying to get away with it. I do think there's a much larger subset of people that are not reporting taxes, not because they don't want to, but because it's extremely difficult, the data that's obtained from various centralized exchanges or even directly from the Blockchain to be able to put together your tax return and calculate it. What you feel comfortable is being accurate and and not be worried that you're misreporting to the IRS is extremely difficult. Uh So that's something that was actually something that brought me from the IRS to tax bit. That's a problem, tax it is trying to solve. Um We're also trying to solve that. Looking ahead, I saw the banner on the bottom about the treasury regulation hearing that's scheduled uh for tax information reporting to make life easier. And, but it is interesting as you mentioned, Jennifer in the, in the hearing with Kracken earlier this year when the IRS was going to enforcement on the John Doe summits. Kracken pointed out the difficulty they have as an exchange with all of this data, they have uh across their various systems and how hard it was going to be to pull that data and assemble it for the IRS to respond to the I RSI R S's inquiry. Now on that note, given your experience, what do you make of the I RSS proposed rule for enforcing broker reporting requirements on certain types of crypto entities and transactions. I think they're making uh really have led with an olive branch to the industry. I know there's a lot of people that are very dissatisfied with the rules. We uh I also coming from my background, you got to keep in mind that the IRS is merely trying to administer or implement a rule that Congress passed. This wasn't something the IRS came up with on its own or just said, hey, we want to go do this. Congress passed these laws almost two years ago. The IRS took two years to put together the draft regulations that would implement the laws mostly to try to find the best way to do it. And it's still not perfect and it's probably never going to be perfect. There's always a little bit of a, a friction between regulatory agencies and an industry. But I, I think some of the responses coming in and some of the approaches, uh some of the responses coming in are very well thought out and some of what the IRS put out and Treasury Department put out in, the proposed rates are very good. And I do think something that goes uh like left untalked about at times, is that what the IRS is doing or what Congress was trying to solve was not only helping the IRS track down non compliant taxpayers, but also trying to help people with this data problem. I just mentioned, it's trying to make it easier where an individual who's engaged in crypto activities is now going to get a form that just says, hey, you bought and sold these, you know, crypto assets and you paid X amount and sold them for Y amount. And so you can just put that right on your tax return. So it's almost a consumer protection element to what the plan is here. Not so much so the IRS can chase people down. I think the IRS has better things to do and really doesn't have the resources to, to chase everyone down. They'd rather just get the information in and, and pay, pay out, you know, handle their tax stuff. All right. Miles, we are going to have to leave it there. Thanks so much for joining the show show and giving us that insight into our taxes. Awesome. Thank you for having me. That was tax its head of government solutions miles Fuller and don't forget to check out coindesk dot com for more analysis and insights on taxes and crypto this week.