These investors lost access to their funds. Now they may be liable for taxes

After his account with the insolvent cryptocurrency lender Celsius Network was suspended, locking more than $210,000 in assets, Rogan Seldlin believed things couldn’t get any worse. The tax bill then appeared.

The Florida-based 41-year-old software designer initially began making investments with Celsius in April 2021, drawn in by the platform’s double-digit rates on crypto holdings kept there. He even borrowed a $125,000 home equity line of credit and invested it all in Celsius. Seldlin experienced a range of emotions when the lender stopped allowing withdrawals in June, including rage, irritation, and finally resigned acceptance that the money was gone.

A 1099 tax form was delivered, which made the anguish worse. He still owes income taxes on the $8,000 in interest he earned in 2022 despite not being able to access his money, according to the form.

“I’m actually freaking out”, he admitted. “It’s beyond frustrating since I lost everything that initially piqued people’s interest.”

According to the Internal Revenue Service, interest earned on bank accounts, certificates of deposit, and corporate bonds is taxed in the year it is created. It usually follows a very simple procedure: Banks and other organizations issue 1099 forms outlining the taxpayer’s interest income, which are subsequently taken into account for calculating overall tax obligations.

In contrast, investors are now facing tax bills for money that was locked up on platforms like Celsius and Voyager Digital, which have stopped user withdrawals while they go through bankruptcy, as a result of last year’s crypto meltdown.

It couldn’t have happened to cryptocurrency investors at a worse time. Inflation, high housing costs, and rising interest rates are also making it harder for average people to cover regular expenses, let alone taxes on investments they’ve probably lost. As a result, digital asset prices have not just plummeted in the wake of FTX’s collapse.

A request for comment from the IRS did not immediately receive a response.

Added Blow

Taxpayers are required to report all of their income on their federal income tax returns, which are due this year on April 18. Depending on their income band, this year’s tax rates range from 10% to 37%. Some persons will also have to pay capital gains taxes on their profits from selling investments.

Capital gains are unlikely to be an issue for many crypto investors in 2022 given the poor performance of digital assets, but interest from the lending divisions of crypto platforms could be. These rates were frequently substantially greater than those provided by conventional financial institutions; Celsius compensated users up to 18% annually for keeping their coins on the site.

Getting one of those forms indicates the IRS is aware of your income, making it even more crucial to report it appropriately, according to Adam Markowitz, a tax advisor with Luminary Tax Advisors in Orlando, Florida. All income is theoretically taxable regardless of whether you receive a 1099 form or not.

Personal experience allows Markowitz to relate. Additionally, he has thousands of dollars’ worth of cryptocurrency held in Celsius’s vaults, and he recently received a 1099 form for the interest he earned, which he found unexpected considering that the business is presently embroiled in bankruptcy proceedings.

His clients have questioned whether crypto possessions that are locked up qualify as capital losses. If capital losses outweigh capital gains, taxpayers are allowed to deduct up to $3,000 from their income each year, according to the IRS. But according to Markowitz, losses can’t yet be tallied because the businesses that are now holding the funds are involved in bankruptcy proceedings.

Holdings in the Dark

The appearance of a 1099 form came as a shock to Dan Striker, who was already struggling. The 63-year-old, who works in private equity in San Antonio, owns digital assets on Celsius that are worth around $2.8 million.

His holdings peaked at a value of approximately $10 million. His funds are now locked, asset prices have plummeted, and he recently received a 1099 for interest income totaling over $66,000.

Although Striker is not yet sure when he will retire, it won’t be soon.

He confessed,

I put all my eggs in one basket. And I’m exhausted.

According to William Stromsem, an accounting professor at the George Washington University School of Business, those who lost money may eventually be able to deduct theft losses from their taxes. But to do that, the people in charge of the various crypto platforms would need to be found guilty of fraud in some way.

Another option is for investors to declare their cryptocurrency holdings as worthless securities, which would qualify them as capital losses, according to TurboTax tax expert Lisa Greene-Lewis. The best course of action is to record the interest income this year as stated on the 1099 form as doing otherwise won’t be possible until bankruptcy procedures are over.

Despite having roughly $90,000 worth of cryptocurrency locked up, Keith Lorens in Houston just received a 1099 from Celsius indicating the $2,700 in interest he earned last year. Additionally, he has roughly $250,000 locked in his Voyager account, but no tax form has yet been received from them.

The 62-year-old engineering consultant is getting impatient with the drawn-out bankruptcy procedure but hopes to one day write it off as a loss.

Lorens added:

You lose all your money and they want to tax you. It’s a very difficult situation that you may need to fight your way out of.

Related

• IRS Pursues Crypto Tax Evaders at M.Y. Safra Bank
• NFT Taxes – A Complete Guide
• The collapse of FTX was criminal, not accidental