Public tax accountant Shehan Chandrasekera has suggested that the United States tax code may be the only solution for investors with money locked in troubled platforms like crypto lender Celsius and broker Voyager Digital.
Chandrasekera highlighted that the U.S. tax code should act as a nonbusiness bad debt write-off for the investors but does not guarantee the entire recovery of the lost money, CNBC reported on July 6.
“If your funds become totally worthless and irrecoverable, you may be eligible to write them off as a nonbusiness bad debt on your taxes. It’s not going to cover up your entire 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,” said Chandrasekera.
No qualified investor
The lending platforms halted withdrawals citing challenges with liquidity, and Chandrasekera notes that investors could only qualify if the ‘totally uncollectible’ status is achieved.
Some crypto lending companies have readjusted their business to free up funds through restructuring operations and adding separate lines of credit.
Therefore, none of the investors has qualified for the relief since there is room for normal operations to resume, especially with a potential rally in the crypto market.
However, before qualifying for the write-off, the accountant said that the affected investors must stick to the criteria set by the IRS, like explaining the nature of the losses through a bad debt statement.
Efforts to recover funds
Chandrasekera emphasised that investors need to exhibit efforts undertaken to recover the held-up money and prove why the debt is worthless. In this case, if the investor recovers the money in the future, they might include it in their gross income. He, however, cautioned that investors need updated records while dealing with the IRS.
Amid the ongoing crypto market sell-off, most businesses in the sector have been forced to halt normal operations. The impact of the market condition was first highlighted by Celsius, which stopped withdrawal before announcing additional restructuring measures like laying off workers.
The company also hired restructuring lawyers alongside pausing interacting with community members through social media.