FTX Bankruptcy Tax Guide: How to Claim Your Loss
How to handle FTX bankruptcy losses on your taxes. When to claim the deduction, what type of loss applies, how to calculate your FTX loss, and required documentation.
FTX Collapsed in November 2022 — Here's How to Handle the Taxes
FTX Exchange filed for Chapter 11 bankruptcy on November 11, 2022. The collapse was one of the largest in crypto history, with billions in customer funds allegedly misappropriated. The FTX bankruptcy estate began distributing funds to creditors in 2024, with cash distributions (in USD) paid out to creditors based on their November 2022 claim values.
The unique feature of FTX's distribution plan: creditors received US dollar payments based on the November 2022 FMV of their holdings — not current crypto prices. This has significant tax implications.
The IRS Guidance on Exchange Losses: CCA 202302011
The IRS issued Chief Counsel Advice 202302011 addressing crypto exchange insolvency losses. Key conclusions:
- Losses on crypto held at an insolvent exchange may be deductible under IRC §165
- The loss is deductible in the year the loss is fixed — generally when bankruptcy proceedings establish recovery amounts or when the taxpayer can demonstrate the exchange is worthless
- The loss type is a capital loss for investors (IRC §1222), not an ordinary loss
- Theft loss treatment under IRC §165(e) is possible if fraudulent misappropriation is demonstrated, but this classification carries more scrutiny and documentation requirements
When to Claim the FTX Loss: 2022 vs. Later
This is the most contested question:
- Aggressive position (2022): Some practitioners argue the loss was effectively fixed in November 2022 when FTX became insolvent and withdrawals halted — particularly for theft loss treatment, given the fraud involved.
- Conservative position (2024): The safer approach is to deduct the loss in the year your specific recovery amount became fixed — when the bankruptcy court confirmed the distribution and you received (or were informed of) the cash proceeds.
Given the IRS scrutiny on crypto losses and the large amounts involved, consult a tax professional for your specific situation. The 2024 distribution year is the clearest defensible position for most creditors.
Calculating Your FTX Loss
FTX distributed cash (USD) to creditors based on November 2022 asset values. Your loss calculation:
Capital Loss = Original Cost Basis of FTX Assets − Cash Received in Distribution
Example: You had 5 ETH on FTX with a cost basis of $10,000 (bought at $2,000/ETH). In November 2022, ETH was worth ~$1,200. FTX's distribution plan was based on $6,000 FMV. If you received $6,000 in cash distribution, your capital loss is $10,000 − $6,000 = $4,000.
Note: The distribution was in USD, so your recovery equals the cash received. The FTX estate's use of November 2022 pricing (rather than current prices) was a significant disadvantage for creditors who held assets that later recovered in value.
Theft Loss Treatment: Is It Available?
Theft losses under IRC §165(e) have historically been deductible as ordinary losses (not capital losses), which is more favorable since they offset ordinary income without the $3,000 annual cap. However:
- The 2017 Tax Cuts and Jobs Act suspended most theft loss deductions for individuals from 2018–2025 (later extended), except for losses from federally declared disasters
- The IRS's 2009 Ponzi scheme ruling (Rev. Proc. 2009-20) provided a safe harbor for theft loss deductions — some practitioners argue it applies to FTX
- This is a complex, litigated area — professional advice is strongly recommended for large FTX losses
Required Documentation
- FTX account statements showing your balances as of November 2022
- Historical price data for your FTX holdings on November 11, 2022
- Your cost basis records for all assets held on FTX
- Official bankruptcy claim confirmation from the FTX estate
- Distribution notices showing the USD amount received
- Form 1099 if issued by the FTX estate
Reporting on Your Return
Report on Form 8949 as a capital loss (long-term or short-term based on your holding period for each asset). Attach a detailed statement to your return documenting the FTX claim, distribution amount, and loss calculation. Label the transaction clearly as "FTX bankruptcy loss — [asset] — confirmed [year]."
Calculate Your FTX Losses with Blockchain Smart Tax
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