Celsius customers, particularly those who took advantage of the crypto Earn offerings, now have a complex tax situation.
Nearly 600,000 users of now-bankrupt crypto platform Celsius Network have been dealt a blow over the past week, with a US bankruptcy judge ruling that most of the cryptocurrency deposits on the platform are owned by Celsius and not the depositors.
Over $4 billion in assets are affected by the ruling, with customers who had deposited crypto into Celsius’ yield-earning product sitting lower in the pecking order than those who had deposited into Celsius custody accounts.
It appears as though there is a revelation almost every other day concerning the fallout from FTX, Celsius, Gemini, Voyager, BlockFi and Genesis. The crypto community now seems to be collectively returning to its roots and taking custody of their crypto once again, with data showing crypto being withdrawn from centralised exchanges en masse throughout the end of 2022.
The mantra “not your keys, not your crypto” has been a feature of previous generations of crypto participants. With an estimated 7 million customers collectively impacted by the recent collapses of major crypto exchanges and yield providers, this may be a seminal moment for the industry.
So what’s happening when it comes to holding crypto in yield-earning platforms, and what options do you have as a crypto investor looking to custody your crypto — and are there any tax implications?
Is it the end of “crypto earn” products?
In the last two months, the U.S. Securities and Exchange Commission (SEC) has charged both Genesis and Gemini for the “Unregistered Offer and Sale of Crypto Asset Securities”, and Bulgarian prosecutors launched an investigation into crypto yield platform Nexo. Oh — plus a swathe of charges from the SEC have landed against former members of FTX’s executive team, including fraud and violations of campaign financing laws. Yikes.
While it’s not looking great for crypto earn platforms, DeFi platforms have seen nearly a 20% increase in Total Value Locked (TVL) since the start of 2023 alone. With Ethereum set to allow unstaking sometime in Q2 2023, we may see a DeFi renaissance — especially with further crackdowns on centralised exchanges and earn platforms likely to continue.
I’m a Celsius Earn customer. Can I claim a tax loss?
In short, the situation is still unfolding — and it will be unlikely a taxpayer can declare their funds as ‘lost’ for tax purposes until Chapter 11 proceedings are completed.
It’s important to seek advice from a qualified tax professional to understand the specific options applicable to you. In most cases, as far as the bankruptcy proceedings are ongoing, it is uncertain which amount of crypto a user has ‘lost’; therefore, any tax loss claim might be premature.
Whilst tax rules differ across countries, often the key is whether a ‘disposal’ or sale event
has occurred when depositing funds into the Celsius Earn platform. As an investor, in most countries, including the UK, US, Canada and Australia, crypto is treated as ‘property’ or a ‘capital gains tax asset’ (CGT asset), where tax is calculated on any gains you make when the asset is sold or disposed of. This was also one of the points raised by creditors in this court case.
A taxable event is likely to occur if you lose ‘beneficial ownership’ of your asset. However, if you are moving crypto from one account to another in your own name, this isn’t a taxable event. The US bankruptcy court ruling provides insight into the complexities of navigating crypto tax, particularly for yield-generating platforms, which are often marketed as savings accounts.
The bottom line is that you may have a taxable disposal where you sell or give away title to the asset (or, in some countries, change beneficial ownership). However, there is yet to be clear guidance from tax authorities surrounding this for crypto-specific scenarios.
What are the tax implications of self-custody?
With the self-custody of private keys comes increased responsibility. This includes the responsibility to consider your tax obligations. With more people taking self-custody of their crypto, taking custody of your digital assets is unlikely to have any tax consequences versus keeping your crypto on a centralised exchange.
If you lose your private keys, you may be able to claim a capital loss, depending on which jurisdiction you’re in. In the US, stolen crypto assets generally cannot be claimed as a tax loss, whereas in the UK, you must submit a negligible value claim. Australia has prescribed evidence that must be retained to claim a capital loss for a lost/stolen asset.
Always read the T&Cs
If there is a learning from recent events, it’s to ensure you read the T&Cs of any crypto product you deposit funds into. Try to understand the potential risks and be aware of your crypto tax obligations, which are not always straightforward.
Following multiple industry bankruptcies, exchanges are now seeking to be more transparent, creating Proof of Reserves to evidence ownership of customer deposits and liquidity.
If you’ve got multiple wallets across centralised exchanges and DeFi protocols, plus a handful of self-custody wallets, keep in mind that calculating crypto taxes can be outsourced.