The FTX collapse dealt a tough blow to many crypto investors, but you may be able to mitigate the financial impact by claiming a tax loss on your cryptocurrency. If you need help with the process, don’t hesitate to reach out to us at CoPilot Tax. Our team of experts will guide you through the process of filing an FTX claim for tax losses and get you back on track.

What happened to FTX?

Without getting into the nitty gritty, a report came out that Alameda Research, a crypto trading company, and FTX Trading Ltd, a crypto exchange, were too closely related and unstable. People started selling their crypto on FTX but FTX did not have the cash on hand to handle all those sales. FTX stopped giving people their withdrawals and effectively went into default.

At the same time, Binance, the world’s biggest exchange, was planning on bailing out FTX but ultimately backed away. FTX is now 8 billion dollars in debt with no funds to repay its customers. The cryptocurrency that was in their customers’ accounts were loaned to Alameda to do high risk bets that didn’t pay off.

Those customers included Canadians who invested in cryptocurrency on the FTX exchange. Those Canadians are no longer able to get their funds back. While they may receive some funds as part of their bankruptcy proceedings, the amount they are expected to receive is pennies on the dollar of their investments.

Can I claim these FTX losses on my tax return?

The CRA hasn’t made any announcements but we can draw on existing principles.

Before analyzing if it can be claimed, we first need to determine what type of crypto trader you are. Crypto income can either be treated as:

1. Business income or loss if you’re carrying on a crypto business; or

2. A capital gain or loss if you’re not carrying on a crypto business.

The CRA has more details if you’re interested in finding out what kind you are. If you’re unsure what category your crypto income or loss falls under, contact us for an analysis.

We now have to analyze whether and how losses can be claimed under each scenario.

Losses for People Carrying on a Crypto Business

When you are considered to by carrying on a crypto business, you crypto essentially becomes your inventory. You can generally claim a loss on any inventory that is stolen or embezzled with som limitations. One of those limitations is elaborated in paragraph 1.33 of this CRA publication. According to the CRA publication, the loss is deductible if it meets these two requirements:

• These losses are an inherent risk of carrying on a crypto business, and

• These losses are reasonably incidental to carrying on a crypto business

These two requirements may be tough to meet. So much so that it went to court in a situation where two officers of a company embezzled funds from a corporation. The Court denied the deduction as the Court did not find the embezzlement to be reasonably incidental to the company’s business. Whether you can deduct your loss will depend on the facts of your situation but understand there is a risk that if you do claim a loss, the loss can be denied.

If you’re eligible to claim a loss, you would not be able to deduct the potential gain that you lost, only the cost of the crypto at the amount you purchased it for. The loss would be deductible against other business income or other types of income. Proceeds received in the following year as part of the bankruptcy will be income for those years.

Losses For People not Carrying on a Crypto Business

If you’re not carrying on a crypto business, your crypto is generally seen as capital assets. If you suffer a loss of your capital assets from theft/embezzlement of crypto, you can effectively claim a loss on your crypto. The amount of the loss would be calculated as the cost of the crypto less the amount of proceeds from the theft/embezzlement (i.e. lawsuit proceeds). The loss would be treated as a capital loss meaning it can only be used to offset capital gains. Capital losses can be carried back for up to 3 years if you had capital gains in the previous 3 year or it can be carried forward indefinitely until you have capital gains.

Other tips

Keep good records because if the CRA were to audit you, they would need some sort of proof that you suffered the loss. Typically, any trading records for the purchase of your crypto that lost on FTX would suffice.

How we can help

Get personalized help Claiming FTX Tax Losses at CoPilot Tax. Our team is dedicated to providing customer-focused service and helping you reach your financial goals. Contact us for professional assistance with crypto tax accounting and make sure you’re paying the right amount of tax on your FTX investments