Lost Crypto in FTX Bankruptcy? Tax Write-Off Guide 2026
Written by Davit Cho | Crypto Tax Specialist | CEO at JejuPanaTek (2012~)
Credentials Patent Holder (Patent #10-1998821) | 7+ years crypto investing since 2017 | Personally filed crypto taxes since 2018
Sources IRS Official Publications, Koinly Tax Guides, Gordon Law Resources, CryptoTaxAudit Expert Analysis, Court Documents
Published December 30, 2025 | Last Updated December 30, 2025
Sponsorship None | Contact davitchh@gmail.com
LinkedIn linkedin.com/in/davit-cho-crypto | Blog legalmoneytalk.blogspot.com
FTX collapsed in November 2022 and billions of dollars in customer funds vanished overnight. Celsius filed for bankruptcy in July 2022 and locked millions of users out of their accounts. If you lost money in these crypto bankruptcies you might be able to write off those losses on your taxes but the rules are complicated and the timing matters.
The good news is that FTX started repaying customers in February 2025 and has distributed over 7.1 billion dollars so far. Celsius began distributions in January 2024 with a 79.2 percent recovery plan. The bad news is that receiving these distributions creates new tax obligations and many investors are confused about what they owe. I think this is one of the most complex tax situations crypto investors have ever faced.
The FTX Celsius Bankruptcy Crisis
FTX was once the third largest crypto exchange in the world with over 1 million users and billions in daily trading volume. When founder Sam Bankman-Fried was exposed for misusing customer funds the exchange collapsed within days. The bankruptcy filing revealed an 8 billion dollar hole in customer accounts and sparked the largest crypto bankruptcy in history.
Sam Bankman-Fried was convicted on seven counts of fraud and sentenced to 25 years in federal prison. The FTX estate recovered far more assets than expected and announced plans to repay 16 billion dollars to creditors. Distributions began on February 18 2025 for claims under 50000 dollars and larger claims followed in subsequent rounds.
Celsius operated differently as a crypto lending platform promising high interest rates on deposits. When the crypto market crashed in 2022 Celsius froze all withdrawals and filed for bankruptcy protection. An independent examiner concluded that founder Alex Mashinsky operated the platform as a Ponzi scheme by using new deposits to pay existing customers.
Alex Mashinsky faces seven criminal charges including securities fraud commodities fraud and wire fraud. The Celsius bankruptcy plan approved a 79.2 percent recovery rate paid in Bitcoin Ethereum and shares of the new company Ionic Digital. Distributions started in January 2024 and most creditors have now received their initial payments.
Major Crypto Bankruptcy Overview
| Exchange | Bankruptcy Date | Distribution Start | Recovery Rate |
|---|---|---|---|
| FTX | November 2022 | February 2025 | 118%+ |
| Celsius | July 2022 | January 2024 | 79.2% |
| Voyager | July 2022 | 2023 | 35-40% |
| BlockFi | November 2022 | 2024 | Varies |
Voyager Digital and BlockFi also filed for bankruptcy in 2022 creating a cascade of failures across the crypto lending industry. Genesis followed in January 2023 after parent company Digital Currency Group faced liquidity issues. Each bankruptcy has its own timeline and recovery structure making tax planning extremely complex for affected investors.
Lost money in FTX or Celsius? Check your claim status now
When Can You Claim Your Loss
The IRS does not allow you to claim a loss while your assets are frozen or tied up in bankruptcy proceedings. According to the Taxpayer Advocate Service you cannot claim a taxable loss until the loss is complete and final. This means you must wait until you receive your distribution or the court confirms no more distributions will be made.
There are three key taxable events in crypto bankruptcy cases. The first occurs when you receive a distribution from the bankruptcy estate. The second happens when additional distributions come from the sale of illiquid assets. The third takes place when court proceedings finalize and confirm no more distributions will be made.
For FTX customers who received distributions in 2025 the tax year for reporting depends on when you actually received the funds. If you received Bitcoin or cash in February 2025 you report any gain or loss on your 2025 tax return filed in 2026. Celsius distributions received in 2024 are reported on your 2024 tax return.
The IRS requires you to calculate your cost basis for the assets you lost. Cost basis is the original value you paid for the cryptocurrency plus any transaction fees. Without accurate cost basis records you cannot properly calculate your loss or gain from the bankruptcy distribution.
Loss Deduction Timing Rules
| Situation | Can Claim Loss? | Tax Year |
|---|---|---|
| Assets Frozen | No | N/A |
| Bankruptcy Pending | No | N/A |
| Partial Distribution Received | Partial | Distribution Year |
| Proceedings Finalized | Full | Final Year |
Your maximum potential loss equals your total cost basis in the assets you lost. Any distributions you receive reduce that maximum loss. The formula is straightforward. Maximum Loss minus Fair Value of All Distributions equals Total Claimable Loss. If you receive more than your cost basis you have a taxable gain instead.
Three Ways to Deduct Bankruptcy Losses
There are three main ways to deduct crypto bankruptcy losses on your tax return. Each has different rules and limitations so choosing the right method can save you thousands of dollars. The three options are capital loss treatment investment loss treatment and Ponzi scheme loss treatment.
Capital loss treatment under Section 165(f) is the most common approach. Cryptocurrency is treated as property so losses are subject to capital loss rules. You can use capital losses to offset capital gains dollar for dollar. Any remaining loss up to 3000 dollars can offset ordinary income and excess losses carry forward to future years.
The limitation with capital losses is the 3000 dollar annual cap on offsetting ordinary income. If you lost 100000 dollars in Celsius and have no capital gains it would take over 33 years to fully deduct your loss. This makes capital loss treatment unfavorable for large losses.
Investment loss treatment as an ordinary loss was possible before 2017 but the Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions for individuals. This means most investors cannot claim crypto bankruptcy losses as ordinary losses unless they held the crypto for business purposes.
Loss Deduction Method Comparison
| Method | Annual Limit | Offsets | Audit Risk |
|---|---|---|---|
| Capital Loss | $3,000/year | Capital Gains + Income | Low |
| Ponzi Loss | Unlimited | All Ordinary Income | High |
| Investment Loss | Not Available | N/A | N/A |
Ponzi scheme loss treatment is the most favorable option but also carries the highest audit risk. If the bankruptcy is determined to be a Ponzi scheme you can use the Safe Harbor Ponzi Loss rules created after the Bernie Madoff scandal. This allows you to deduct 75 percent of your loss immediately against ordinary income with no annual limit.
Tax on Recovery Distributions
When you receive a distribution from a crypto bankruptcy the tax treatment depends on what you receive and what you originally lost. If you receive the same cryptocurrency you lost this is called a like-kind distribution and is generally not taxable. Your original cost basis carries over to the returned crypto.
For Celsius the distribution structure is complex. Creditors receive 28.95 percent in Bitcoin and 28.95 percent in Ethereum and 14.9 percent in Ionic Digital stock and 6.4 percent from illiquid asset sales. The remaining 20.8 percent is likely unrecoverable. This means most creditors receive different assets than they originally deposited.
When you receive different assets than you deposited a forced liquidation occurs for tax purposes. The IRS treats this as if your original assets were sold at the bankruptcy petition date prices and then used to purchase the new assets. This can trigger capital gains or losses depending on your original cost basis.
FTX is unique because claims were valued at bankruptcy petition date prices when Bitcoin was around 16000 dollars. Now that Bitcoin exceeds 100000 dollars creditors receiving cash get far less Bitcoin value than they lost. This creates complex tax situations where you might have a loss for tax purposes even while receiving more dollars than your claim amount.
Celsius Distribution Breakdown
| Component | Percentage | Reference Price |
|---|---|---|
| Bitcoin | 28.95% | $42,972.99 |
| Ethereum | 28.95% | $2,577.48 |
| Ionic Stock | 14.9% | $20.00 |
| Illiquid Assets | 6.4% | TBD |
| Unrecoverable | 20.8% | N/A |
Cost basis allocation is the most challenging part of calculating your tax from bankruptcy distributions. You must allocate your original cost basis across different categories based on what you receive. Returned cryptocurrency keeps its original cost basis while new cryptocurrency receives allocated cost basis based on proportional distribution percentages.
Safe Harbor Ponzi Loss Strategy
The Safe Harbor Ponzi Loss was created by the IRS in 2009 after the Bernie Madoff scandal to help victims of investment fraud. If a crypto platform is determined to be a Ponzi scheme victims can use this special deduction. The Celsius bankruptcy court examiner concluded that Celsius operated as a Ponzi scheme making this option potentially available.
The Ponzi loss allows you to deduct 75 percent of your loss in the year of discovery while reserving 25 percent for potential future recoveries. Unlike capital losses there is no annual limit on how much you can deduct. This means a 100000 dollar loss could offset 75000 dollars of ordinary income in a single year.
For Celsius the year of discovery is 2023 when founder Alex Mashinsky was indicted on criminal charges. If you wanted to claim the Ponzi loss you needed to file it on your 2023 tax return by the October 15 2024 extension deadline. If you missed this deadline you cannot retroactively claim the Ponzi loss.
The major downside of the Ponzi loss is increased audit risk. This is an uncommon deduction and the IRS may scrutinize claims carefully. You must also itemize deductions rather than taking the standard deduction which may not be beneficial for all taxpayers. Consult with a crypto tax professional before choosing this option.
If you claim the Ponzi loss and later receive distributions exceeding your reserved 25 percent the excess becomes taxable ordinary income. This means you could end up owing taxes on future distributions even if you never fully recover your original investment. Planning for multiple tax years is essential.
How to Report on Your Tax Return
Crypto bankruptcy losses and distributions must be reported on multiple tax forms depending on the type of transaction. Capital losses go on Form 8949 and Schedule D. Ponzi losses go on Schedule A as an itemized deduction. Future sales of distributed cryptocurrency are reported on Form 8949 in the year of sale.
Form 1040 now includes a digital asset question that every taxpayer must answer. If you received distributions from a crypto bankruptcy or lost assets to a bankrupt exchange you must answer Yes to this question. Failure to disclose digital asset transactions can result in penalties and increased audit risk.
Starting in 2026 Form 1099-DA will require crypto exchanges to report transactions directly to the IRS. Bankruptcy distributions may trigger Form 1099-MISC or other information returns from the bankruptcy estate. Both FTX and Celsius have published tax FAQs on their official claims portals to help creditors understand reporting requirements.
Tax Forms for Bankruptcy Losses
| Transaction | Form | Section |
|---|---|---|
| Capital Loss | Form 8949 | Part I or II |
| Loss Summary | Schedule D | All Parts |
| Ponzi Loss | Schedule A | Itemized Deductions |
| Digital Asset Question | Form 1040 | Page 1 |
Crypto tax software like Koinly CoinTracker and TaxBit can help calculate your cost basis and generate the required tax forms. Import your transaction history from the bankrupt exchange if available and let the software calculate your gains and losses. This is especially important for complex situations with multiple asset types and partial distributions.
Keep records for at least seven years including original transaction records from the bankrupt exchange wallet addresses deposit and withdrawal confirmations bankruptcy claim documents and distribution receipts. The IRS has increased enforcement on crypto tax compliance and accurate records are your best defense in an audit.
User Experience Analysis
Analyzing user reviews and community discussions reveals common experiences with crypto bankruptcy tax situations. Many FTX users report confusion about whether their distributions are taxable especially when they received more dollars than their original claim value due to Bitcoin appreciation during the bankruptcy period.
Celsius users frequently mention the complexity of receiving multiple asset types including Bitcoin Ethereum and Ionic Digital stock. Users report that calculating cost basis allocation across these categories is extremely difficult without professional help or specialized software. The stock component adds additional complexity since it is not publicly traded.
Users who attempted to claim Ponzi losses report mixed results. Some successfully reduced their tax burden significantly while others faced IRS scrutiny and had to provide extensive documentation. The consensus is that Ponzi loss treatment should only be used with guidance from a qualified tax professional.
Common mistakes users report include claiming losses before distributions are finalized and failing to track cost basis for distributed assets and not answering the digital asset question on Form 1040. These errors can trigger IRS notices and potential audits which add stress to an already difficult situation.
FAQ
Q1. Do I have to pay taxes on my FTX distribution?
A1. It depends on your original cost basis. If you receive less than your cost basis you have a loss. If you receive more you have a taxable gain. FTX claims were valued at bankruptcy petition date prices so the calculation is complex.
Q2. Can I deduct my Celsius loss on my 2024 taxes?
A2. Partially yes. You can deduct the difference between your cost basis and the distributions received in 2024. The 20.8 percent unrecoverable portion cannot be deducted until court proceedings finalize.
Q3. Is the Ponzi loss better than capital loss treatment?
A3. For large losses yes. Capital losses are limited to 3000 dollars per year against ordinary income while Ponzi losses have no limit. However Ponzi losses carry higher audit risk and require itemized deductions.
Q4. What if I earned interest on Celsius before bankruptcy?
A4. Interest earned should have been reported as ordinary income when received. If that interest is now frozen in bankruptcy you can include it in your loss calculation. The cost basis is the fair market value when you received the interest.
Q5. I sold my bankruptcy claim to another creditor. What are the tax implications?
A5. The difference between the sale price and your cost basis is your capital gain or loss. Once you sell the claim all future distributions belong to the buyer and you have no further tax obligations from the bankruptcy.
Q6. My cryptocurrency became completely worthless. How do I report it?
A6. Cryptocurrency that becomes exactly zero or is delisted from exchanges may qualify as a worthless security loss. However the IRS does not treat crypto as securities so the worthless securities rules on Form 8949 do not directly apply.
Q7. How do I handle the stock I received from Celsius?
A7. Ionic Digital stock is treated as a forced liquidation. The difference between the stock fair market value and your allocated cost basis is your gain or loss. When you eventually sell the stock you will have another taxable event.
Q8. How long should I keep records of my bankruptcy transactions?
A8. Keep records for at least seven years. Bankruptcy proceedings can span multiple years and you will need original records for future distributions and potential IRS audits.
Q9. Will I receive a tax form from FTX or Celsius?
A9. Possibly. The bankruptcy estates may issue Form 1099-MISC for distributions. Starting in 2026 Form 1099-DA will be required for crypto transactions. Check the official claims portal for tax documentation.
Q10. Can I use crypto tax software for bankruptcy losses?
A10. Yes. Koinly CoinTracker and TaxBit all support bankruptcy transaction tracking. You may need to manually enter some transactions if the bankrupt exchange data is unavailable.
Q11. What is the deadline to claim my 2024 Celsius loss?
A11. April 15 2025 is the standard deadline. If you file an extension the deadline is October 15 2025. Ponzi losses for 2023 must have been claimed by October 15 2024.
Q12. Do I need to hire a tax professional for bankruptcy losses?
A12. For complex situations involving multiple asset types large losses or Ponzi loss claims professional help is highly recommended. The cost of a tax professional is usually less than the cost of errors or missed deductions.
Q13. Can I deduct legal fees related to my bankruptcy claim?
A13. Legal fees for tax advice may be deductible as part of your investment expenses. However the Tax Cuts and Jobs Act limited miscellaneous itemized deductions so consult with a tax professional.
Q14. What if I receive future distributions after claiming my loss?
A14. Future distributions reduce your remaining loss or create taxable income if they exceed your reserved cost basis. You must report each distribution in the year received.
Q15. Does the IRS know about my FTX or Celsius account?
A15. Likely yes. Bankruptcy estates provide creditor lists to the court and the IRS has blockchain analytics capabilities. Failing to report can trigger IRS letters 6173 6174 or 6174-A.
Q16. Can I carry forward my bankruptcy loss indefinitely?
A16. Capital losses can be carried forward indefinitely until fully used. Each year you can offset capital gains and up to 3000 dollars of ordinary income.
Q17. What if I received Bitcoin that is worth more now than when distributed?
A17. The appreciation after distribution is not taxable until you sell. Your cost basis is the fair market value at the time of distribution. Future sales are subject to capital gains tax.
Q18. How do I calculate cost basis for Celsius distributions?
A18. Allocate your original cost basis across distribution categories proportionally. Returned crypto keeps its original basis. New crypto and stock receive allocated basis based on distribution percentages.
Q19. Can I amend past returns to claim losses I missed?
A19. Yes within three years of the original filing deadline. File Form 1040-X to amend. However Ponzi losses must be claimed in the year of discovery and cannot be amended retroactively.
Q20. What is the difference between realized and unrealized losses?
A20. Realized losses occur when you actually receive distributions or the bankruptcy finalizes. Unrealized losses are paper losses from frozen assets that cannot yet be claimed on your taxes.
Q21. Do state taxes apply to bankruptcy losses differently?
A21. Most states follow federal rules for capital losses. However some states have different limitations or do not allow certain deductions. Check your state tax authority for specific rules.
Q22. Can I use tax loss harvesting with bankruptcy distributions?
A22. Yes. If you receive crypto at a loss you can sell it to harvest the loss and offset other gains. The crypto wash sale rule does not apply in 2025 so you can immediately repurchase.
Q23. What happens if I never received my distribution?
A23. If you were entitled to a distribution but never received it contact the bankruptcy claims administrator. You cannot claim a loss for assets you were supposed to receive but did not.
Q24. Is there a minimum loss amount to claim?
A24. No minimum for capital losses. However the paperwork burden may not be worth it for very small amounts. Ponzi losses require itemized deductions which have threshold requirements.
Q25. Can I gift my bankruptcy claim to reduce taxes?
A25. Gifting transfers the cost basis to the recipient. This may be beneficial if the recipient is in a lower tax bracket. Gift tax rules apply for amounts over 18000 dollars per recipient in 2025.
Q26. What if the bankruptcy estate sends me incorrect tax information?
A26. Contact the claims administrator to request a correction. If you receive an incorrect 1099 you can still file accurate information with a statement explaining the discrepancy.
Q27. Can I contribute bankruptcy distributions to a retirement account?
A27. Cash distributions can fund IRA contributions if you have earned income. Crypto distributions cannot be contributed directly to IRAs since in-kind crypto contributions are not permitted.
Q28. What resources does the IRS provide for crypto bankruptcy?
A28. The IRS digital assets page at irs.gov/filing/digital-assets provides general guidance. Revenue Ruling 2019-24 addresses crypto forks and airdrops. No specific guidance exists for bankruptcy situations.
Q29. Should I wait for all distributions before claiming any loss?
A29. You can claim partial losses as distributions are received. However waiting for final determination may simplify calculations. Consult with a tax professional for the best strategy.
Q30. Where can I find more information about FTX and Celsius tax issues?
A30. Official claims portals for FTX at restructuring.ra.kroll.com/ftx and Celsius at cases.stretto.com provide tax FAQs. Koinly Gordon Law and CryptoTaxAudit publish detailed guides for affected investors.
Need help calculating your bankruptcy loss? Start with the IRS guide
Disclaimer
This article is for general informational purposes only and does not constitute legal tax or investment advice. Tax laws are complex and individual circumstances vary. Consult with a qualified tax professional before making decisions about your bankruptcy losses. The author and publisher are not responsible for any losses resulting from the use of this information.
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Tags: Crypto Bankruptcy Tax, FTX Tax Loss, Celsius Tax Deduction, Ponzi Loss IRS, Capital Loss Crypto, Form 8949 Bankruptcy, Crypto Tax Write Off, IRS Digital Assets, Bankruptcy Distribution Tax, Cost Basis Allocation
