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Speaker 1: I'm Stacy Marie Ishmel, Managing editor of Crypto for Bloomberg News,

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Speaker 1: And this is Bloomberg Crypto, a daily Bloomberg ihot podcast.

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Speaker 1: It's Wednesday, March eighth. Voyager, Genesis, Celsius, and of course FTX,

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Speaker 1: all major crypto companies that have filed for bankruptcy, all

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Speaker 1: companies that we've talked about a lot on this podcast.

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Speaker 1: But even if you've heard of these platforms, did you

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Speaker 1: know that there's a tax season quirk facing any US

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Speaker 1: investors who had digital tokens tied up in these accounts.

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Speaker 1: That's right, These investors who lost money because these platforms

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Speaker 1: went bust or filed for bankruptcy me in some cases

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Speaker 1: have to pay taxes on those ass ss that they

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Speaker 1: no longer even have access to. Here to walk us

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Speaker 1: through why some crypto investors are really dreading this US

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Speaker 1: tax season are Bloomberg Reports to Claire Ballentine and Bloomberg

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Speaker 1: Tax Report to Lauren Vella. Will also be joined by

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Speaker 1: Celsius investor Roman Smolkin, who lost money in Celsius and

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Speaker 1: is now facing a tax bill. It is March in

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Speaker 1: the United States, and what that means for a lot

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Speaker 1: of people is they are trying to figure out how

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Speaker 1: long they can possibly avoid thinking about doing their taxes.

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Speaker 1: But there is a group of investors who don't have

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Speaker 1: any choice. They've been thinking about this for a long time,

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Speaker 1: and it's not looking like it's going to be a

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Speaker 1: super fun tax season for them. Claire, tell us more

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Speaker 1: about your reporting on this. So I worked on this

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Speaker 1: story about people who have crypto holdings that are locked

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Speaker 1: up on these bankrupt platforms. That was the huge story

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Speaker 1: last year was that a lot of places where people

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Speaker 1: were keeping their crypto holdings online either went bankrupt or

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Speaker 1: had to freeze withdrawals because the companies were having difficulties

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Speaker 1: so they could no longer access their crypto holdings. That

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Speaker 1: was bad enough. People had thousands, in some case millions

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Speaker 1: of dollars worth of their money they could no longer

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Speaker 1: access and don't know when or if they'll be able to.

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Speaker 1: What's now happening is that in some cases people are

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Speaker 1: getting taxed on it, and it's a very specific part

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Speaker 1: that they're getting taxed on. And so that's if they

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Speaker 1: have crypto that are on exchanges that has earned interest.

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Speaker 1: So a lot of the crypto platforms before they went

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Speaker 1: bankrupt were offering yield products essentially kind of like a

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Speaker 1: traditional bank. You would put your crypto into accounts, then

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Speaker 1: the platforms would loan it out, and you earned interest

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Speaker 1: on that. Interest in general in the US is subject

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Speaker 1: to income taxes, and that includes interest earned on crypto products.

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Speaker 1: So for those investors who had money in crypto lending

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Speaker 1: products and earned interest, they're now being taxed on it

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Speaker 1: despite not being able to actually access those holdings. So,

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Speaker 1: if I'm hearing you correctly, these are folks who say

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Speaker 1: put money in Celsius or in very you know, pick

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Speaker 1: a bankrupt crypto lender who had offered these products because

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Speaker 1: there have been several and they thought, wow, okay, that

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Speaker 1: went poorly for me, And now they're like, wow, this

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Speaker 1: is going even worse than I thought, because I have

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Speaker 1: to pay taxes on something that I don't even have

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Speaker 1: access to. Lauren, how is this possible? Well, I think,

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Speaker 1: first of all, the whole situation is so convoluted and

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Speaker 1: ultimately very specific to where your assets are tied up.

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Speaker 1: For each specific bankruptcy, they're very specific set of rules

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Speaker 1: in terms of you know, Celsius. I think there is

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Speaker 1: an issue there where you know We've got a recent

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Speaker 1: ruling where the judge has said, you know, the coins

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Speaker 1: placed in these earn accounts or these interest earning accounts,

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Speaker 1: they belong to the cryptocurrency lender. They do not belong

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Speaker 1: to the lend. How is this possible? Well, right now,

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Speaker 1: the IRS has made it very clear, at least for now,

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Speaker 1: that there's not a lot of leeway for claiming losses

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Speaker 1: if your sets are tied up in these bankruptcy proceedings.

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Speaker 1: What they have also said is that basically, just because

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Speaker 1: your cryptocurrency has plummeted in value and you've still held

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Speaker 1: onto it does not mean that you get to claim

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Speaker 1: a Section one sixty five deduction. So let me let

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Speaker 1: me make sure I'm understanding this correctly. Even if at

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Speaker 1: the time that I made the deposit my crypto was

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Speaker 1: worth ten thousand dollars and now it's worth like five

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Speaker 1: dollars with no zeros, yes, I can't claim any kind

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Speaker 1: of loss on this. I still have to pay tax

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Speaker 1: on the ten thousand dollars. Well, well you're not. You're

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Speaker 1: just not being able to claim a loss basically right now.

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Speaker 1: So the IRS actually put out guidance in January stating

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Speaker 1: that even if you see this really major shift in value,

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Speaker 1: say you had you had a ten thousand dollars value

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Speaker 1: and it's now a five thousand, or it's not a

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Speaker 1: one thousand. That is not a worthlessness deduction. You have

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Speaker 1: held it, you have not sold it. It still has worth.

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Speaker 1: Even if it went from a dollar to a cent,

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Speaker 1: it still has worth, and you are not allowed to

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Speaker 1: claim that kind of deduction. Claire is absolutely right that

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Speaker 1: if you are generating income from an asset, you are

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Speaker 1: going to be taxed on it. That is just what

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Speaker 1: the IRS has said and done. A that is a

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Speaker 1: regular occurrence. But for now, I think in terms of

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Speaker 1: what I have heard from tax professionals about people who

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Speaker 1: have money or assets on these defunct exchanges, it's kind

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Speaker 1: of a blimbo. It's a wait and see approach. Right now, Well,

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Speaker 1: it's wait and see except for the having to pay taxes. Yes, yes,

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Speaker 1: in that very specific in that very specific instance, if

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Speaker 1: you have let's say, if you're a cruing interest. Now

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Speaker 1: we're joined by someone today who is one of those

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Speaker 1: folks in that wait and see and pay taxes situation.

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Speaker 1: And you know, Roman, you described yourself as a former

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Speaker 1: crypto enthusiast who has been personally affected by Celsius, you know,

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Speaker 1: halting withdrawals and then filing for bankruptcy. Can you share

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Speaker 1: a little bit about what that's been like. Yeah. So

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Speaker 1: I purchased my first bitcoin almost ten years ago or

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Speaker 1: early early on, back when they were in a hundreds

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Speaker 1: and not the tens of towns of a price, and

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Speaker 1: I deposited most of my crypto holdings with Celsius a

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Speaker 1: couple of years ago because they were paying very significant

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Speaker 1: interest rates on just holding the money there, so it

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Speaker 1: seemed like a win win. I was just holding onto

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Speaker 1: my crypto and I was looking forward to getting the

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Speaker 1: interest from them. Now, majority of my personal crypto was

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Speaker 1: actually not in things like bitcoin or ethereum. It was

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Speaker 1: actually stable coins, so I saw those as completely risk free,

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Speaker 1: and they were offering somewhere between nine and like twelve

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Speaker 1: percent interest on stable coins. Celsius and similar platforms. It

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Speaker 1: wasn't just Celia Celsia's Next, so several other platforms were

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Speaker 1: doing the same thing. So Celsius seemed to be the biggest,

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Speaker 1: so I chose them to put the majority of my

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Speaker 1: funds into. It was literally my emergency fund, basically all

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Speaker 1: the cash I had on hand, I put with them

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Speaker 1: because of how well how much interests they were offering.

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Speaker 1: So when Lauren mentioned, you know, the value dropping, I'm like, well,

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Speaker 1: in my case, you really didn't drop, because the biggest

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Speaker 1: percentage was stable coins, and they held their value. Except

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Speaker 1: the judge ruled that now those stable coins belong too

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Speaker 1: Celsius and no me and not yet, I am still

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Speaker 1: having to pay the taxes on the interest that they

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Speaker 1: theoretically earned in the last couple of years, which I

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Speaker 1: already paid the year before as well, except now I

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Speaker 1: don't have access not only to the interest, but also

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Speaker 1: not to the funds themselves. And it's becoming more and

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Speaker 1: more clear that come approximately they're estimating in July of

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Speaker 1: this year, we're going to have some clarity and the

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Speaker 1: percentages of the people are going to get back. Now,

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Speaker 1: some people who had very small amounts invested, and that

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Speaker 1: being five thousand dollars in below, are supposed to get

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Speaker 1: seventy percent of their investment back, so they're gonna lose

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Speaker 1: thirty percent, and I'm pretty sure that once they lose

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Speaker 1: that thirty they should be able to claim it the

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Speaker 1: following year on their taxes. As a lass. I'm hoping

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Speaker 1: for the rest of us who had more than five

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Speaker 1: thousand dollars investment. It's unclear how much we gonna get back,

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Speaker 1: but the rumors are somewhere between like eighteen and thirty percent.

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Speaker 1: You know, it was losing seventy majority invest majority. And

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Speaker 1: there's also very unclear of how it's actually gonna happen,

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Speaker 1: because I don't think they're gonna give us actual coins back.

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Speaker 1: It sounds like they're gonna give us equity in this

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Speaker 1: new company as being formed called literally called New Code,

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Speaker 1: as if they couldn't come up with a better name.

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Speaker 1: I'm like, okay, I didn't put my stable coins and

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Speaker 1: my emergency funds into Celsius too. At the end, end

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Speaker 1: up as a stockholder in some new company who will

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Speaker 1: probably go down to zerof all we know, it could

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Speaker 1: also be the most successful tech startup in you know,

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Speaker 1: the next ten years. It could happen, But the real

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Speaker 1: I think the reality is that they were gonna lose

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Speaker 1: a lot of money and those stocks are going to

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Speaker 1: go down to zero. So essentially I'm gonna lose all

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Speaker 1: of the funds that I had invested in Celsius and

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Speaker 1: still I'm having to come up with money out of

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Speaker 1: pocket to pay taxes this year, and very unclear of

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Speaker 1: what's gonna happen next year, hopefully at least it won't

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Speaker 1: be taxed anymore. It's a very complicated set of realities,

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Speaker 1: and I think one of the things to your point, Roman,

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Speaker 1: is it's unclear what the outcomes are and what the

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Speaker 1: timelines are. Right, So at the moment, you're confronted with

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Speaker 1: a situation in which you have an imminent thing that

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Speaker 1: you have to pay. And even if they you know,

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Speaker 1: various folks involved in this, and there are always out

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Speaker 1: that's all going to come after the end of tax season,

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Speaker 1: when you've all you have already paid this amount. Up next,

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Speaker 1: you'll hear more from my colleagues Claire Valentine and Lauren Vella,

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Speaker 1: as well as from Celsius investor Roman Smulkin on what

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Speaker 1: crypto holders in the US are facing this tax season. Lauren, One,

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Speaker 1: you know possible quirk here is the idea that these

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Speaker 1: might be branded as you know, like fraudulent, right, and

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Speaker 1: like what is the carve out for if a court

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Speaker 1: or to decide, for example, that actually know these folks

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Speaker 1: don't have a liability. What would have to happen for

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Speaker 1: that to be true. So I think this is very

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Speaker 1: specific in the case of FTX, where there are criminal implications.

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Speaker 1: There's a criminal case against Sam Banquin Freed SPF. Colloquially,

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Speaker 1: there is a possibility that you know, I've heard from

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Speaker 1: people in the tax world, specifically in the crypto tax world,

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Speaker 1: where they're saying the Bernie Madoff scandal and the guidance

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Speaker 1: that was issued by the IRS following the scandal could

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Speaker 1: be used as a roadmap or precedent to figure out

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Speaker 1: how if Sam Bankman Freed is convicted, which that has

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Speaker 1: not happened yet, right and he has said that he

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Speaker 1: is not guilty of all charges against him, that could

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Speaker 1: potentially be a roadmap to claim a loss based on theft.

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Speaker 1: So unfortunately, for this particular case for FTX investors, I

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Speaker 1: really it seems like it could be months, it could

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Speaker 1: be years to see how they could potentially claim these losses.

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Speaker 1: What some crypto tax professionals digital asset professionals are saying though,

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Speaker 1: is to make sure that you are keeping very thorough

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Speaker 1: records to figure out what basis is, what you paid

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Speaker 1: for the coin and all of your transactions so that

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Speaker 1: when the time comes, you have that information to provide

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Speaker 1: to the federal government. I also think that there's an

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Speaker 1: element of frustration in the timeline of these proceedings. It's

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Speaker 1: one thing to not know what's going to happen with

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Speaker 1: your holdings that are locked up on these platforms. It's

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Speaker 1: another to be told, oh, you still have to pay

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Speaker 1: interest on it, not even you might have to pay

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Speaker 1: interest if you one day get the holdings back. The

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Speaker 1: one thing that isn't slow in this process is the IRS,

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Speaker 1: and they're coming for the interest income on this. So

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Speaker 1: I think it's just it's another blow to people who

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Speaker 1: already are not doing well to begin with with having

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Speaker 1: their money locked up. And I think you know, in

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Speaker 1: terms of the tax landscape this year, there's some other

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Speaker 1: frustrating things happening. Mutual funds that have lost value are

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Speaker 1: still distributing capital gains taxis that in general isn't fun

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Speaker 1: for people. This is an extra weird one, and this

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Speaker 1: is a case where people are having to pay money

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Speaker 1: sort of needlessly. As we also know, the IRS isn't

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Speaker 1: the most nimble agency, although we hear they're moving, as

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Speaker 1: you say, pretty fast. Yeah, Well, they're they're moving fast.

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Speaker 1: In one regard, they're moving fast to collect the money.

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Speaker 1: In terms of, you know, taking this into consideration, they

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Speaker 1: have not as much. I don't think they quite have

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Speaker 1: a plan for what to do with this. So and

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Speaker 1: in the meantime, you know, the advice that I heard

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Speaker 1: at least was that you should pay this. I mean,

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Speaker 1: you don't want to be faced with the tax audit. Roman.

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Speaker 1: Do you want to be faced with the tax audit? Yeah,

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Speaker 1: So that's the advice I I've heard. And as much

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Speaker 1: as I would hate to pay for it, I'm gonna

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Speaker 1: have to pay for it and then figure it out

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Speaker 1: next year. For the last few years, I'm sorry, Lauren,

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Speaker 1: but I've done turbo tax. But I have a feeling

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Speaker 1: next year and probably the next few years, I'm gonna

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Speaker 1: have to go with the tax expert and literally have

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Speaker 1: them dig in once there's clarity on how those losses

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Speaker 1: will affect the future filings. And I'm really hoping. I've

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Speaker 1: heard there's a concept of amending prior returns. I'm really

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Speaker 1: hoping once all of that has figured out, I can

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Speaker 1: go back to the last two years when I shared

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Speaker 1: significant taxes that I paid on that interest that then

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Speaker 1: in my mind, was stolen from me along with the funds.

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Speaker 1: Then then claim all of it is a loss and

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Speaker 1: recoup some of those not just the funds are probably not,

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Speaker 1: but at least the taxes. So I'm hoping the government

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Speaker 1: will be fair enough to say, hey, listen, if it

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Speaker 1: really does look like those funds were stolen from you,

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Speaker 1: then they I shouldn't have been taxing them to begin with. Broman.

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Speaker 1: Just as a kind of a closing question for you,

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Speaker 1: Hindsights twenty twenty, but is there anything you wish you

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Speaker 1: had done differently, whether it's crypto or all the things

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Speaker 1: that happened before crypto. When you see those kinds of offerings,

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Speaker 1: just be very careful on investing or placing your funds

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Speaker 1: with those kinds of platforms, because those returns truly are unrealistic,

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Speaker 1: especially on a consistent basis. So yeah, I certainly learned

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Speaker 1: my lesson. There's more lessons I have learned, as far

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Speaker 1: as you know. Don't put all your ex in one basket.

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Speaker 1: Never put your emergency fund in any investment platform, because

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Speaker 1: its purpose is to be an emergency fund that can

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Speaker 1: be easily accessed. So into the gamble, I was hoping

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Speaker 1: to make good interest on it, and I would have

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Speaker 1: been happy to pay taxes on the interest if I

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Speaker 1: actually kept my money. But as it worked out, I

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Speaker 1: lost the money, I lost the interest, I lost my

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Speaker 1: emergency fund. Ann Tho, you lost all that, but you

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Speaker 1: gained a tax lawyer, so hopefully you know, hopefully next

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Speaker 1: year will work out better for you well. Roman, Thank

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Speaker 1: you so much for sharing your story, and good luck

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Speaker 1: with the irs and Claire Lauren always a pleasure, Thanks

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Speaker 1: for having us, Thank you, thank you so much. You

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Speaker 1: heard from Bloomberg Report to Claire Ballentine and Bloomberg Tax

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Speaker 1: reporter Lauren Vella. You can find more of their reporting

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Speaker 1: on the Bloomberg terminal and on Bloomberg dot com. For

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Speaker 1: even more, checkout or twice weekly newsletter Bloomberg Crypto. This

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Speaker 1: is Bloomberg Crypto, a daily podcast from Bloomberg and iHeartRadio.

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Speaker 1: For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts,

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Speaker 1: or wherever you get your podcasts. Send us your comments,

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Speaker 1: questions or suggestions for the show to Crypto at Bloomberg

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Speaker 1: dot net. The supervising producer of Bloomberg Crypto is Vicky Vergelina.

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Speaker 1: Our senior producer is Janet Babin. Our producers are Mohammed

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Speaker 1: Faroupe and Sharon Barrero. Our associate producers are Ty Butler

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Speaker 1: and Moses Desta. Wonder At is our engineer. Original music

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Speaker 1: by Leo Sidron. I'm Stacy Marischmaal. We'll be back tomorrow

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Speaker 1: as The Shop The Boy