Frozen Crypto-Cash Could Turn into Tax Writeoff for Investors

Crypto lending firms have become a popular demand due to the 20% annual return on customer deposits, prompting many investors to try their luck on platforms like Celsius. However, a problem arose that is leaving crypto-cash trapped within the platform.

Celsius, the biggest crypto lending platform, is left with the problem of holding customer funds for nearly a month. Although they have yet to announce steps to resolve the problem, Celsius continues to advertise an 18.63% yield on its website.

Those familiar with the traditional banking system may seek protection, but decentralized finance platforms don’t have the same insurance, leaving many investors with significant losses.

Certified public accountant Shehan Chandrasekera shared some hopeful insight with CNBC, telling them the US tax code could provide some relief to victims via an obscure deduction.

“If your funds become totally worthless and irrecoverable, you may be eligible to write them off as a nonbusiness bad debt on your taxes,” said Chandrasekera. “It’s not going to cover up your economic loss, but it’s going to give you some type of tax benefit, because at least you get to write off that initial investment that you put in.”

Besides being an accountant, Shehan Chandrasekera also heads tax strategy at CoinTracker.io – a digital currency tax software company renowned for helping clients track their crypto across virtual wallet addresses and managing their corresponding tax obligations.

Currently, crypto platforms are calling the freezes a temporary setback while finding a solution to shore some liquidity by either restructuring or securing additional lines of credit.

Chandrasekera believes a debt only falls into the “totally uncollectible” category after all attempts to collect have failed.

“It’s also deemed worthless if the borrower files for bankruptcy and the debt is discharged,” he added.

CPA Lewis Taub offered a silver lining, saying that even if a platform declares bankruptcy, holders can still get something in bankruptcy court.

“In order to have a nonbusiness bad debt, there needs to be an actual debtor-creditor relationship,” explained Taub, shedding light on crypto coins and stocks qualifying as writeoff despite being considered non-debt instruments. “So to the extent that crypto was loaned to a platform, that criteria is met.”

While Celsius has been transparent with its terms and conditions, other platforms have kept theirs vague, leading others to speculate the decision to avoid an encounter with the Securities and Exchange Commission.

As a result, CPAs often advise investors to reach out to a financial advisor to clarify if their investment qualifies.

Opinions expressed by Coin Week contributors are their own.