Recovering Crypto in Bankruptcy: Tax Implications You Need to Know

This article has now been updated. Please refer to the updated version here.

The IRD has made it clear that losses suffered from exchange platforms going under are only deductible if bankruptcy proceedings have been finalized. Please see our article here for more information.

A recent development in the Celsius bankruptcy has resulted in many clients recovering a portion of their lost crypto.

Claiming tax deductions for recovered crypto depends on the completion date of the bankruptcy proceedings. If finalization occurs before March 31, 2024, a potential deduction exists for the 2024 tax year.

The deduction would be calculated as follows:

Cost value of crypto initially lost on Celsius, minus, the market value of the funds recovered from Celsius in the bankruptcy proceedings at the time received.

We recommend keeping track of all cryptocurrency lost and recovered from all platforms as well as doing regular stocktakes of crypto

Example

Dave bought 1 ETH for NZ$3,000 and deposited it on Celsius. Unfortunately, he lost it all due to the bankruptcy.

On February 10, 2024, Dave recovered a portion of his lost assets: $300 worth of ETH and $100 worth of BTC (based on their February 10th value).

This means Dave can potentially claim a deduction of NZ$2,600 in his 2024 tax year! This is calculated by subtracting the recovered value (NZ$300 + NZ$100) from his initial cost (NZ$3,000).

The value of his recovered ETH and BTC (NZ$300 and NZ$100) becomes part of his new “cost basis” moving forward. This means any future gains or losses he makes on those assets will be calculated at this value.

In summary, the cryptocurrency deposited to Celscius has been sold in exchange for the cryptocurrency received from the Celsius bankruptcy payout.