Crypto lending platforms like Celsius, Anchor, and Voyager Digital became famous for offering almost unbelievable returns of up to 20% annually on customer deposits. Now, a significant portion of this crypto-money is trapped as the sharp drop in token prices forces platforms to temporarily suspend or limit withdrawals.

After its own solvency crisis, Celsius, which still advertises annual returns of up to 18.63% on its website, has held customer funds for more than three weeks and has yet to announce its next steps.

So who will be left holding the bag when these platforms go belly up?

Unlike the traditional banking system, which typically insures customer deposits, there are no formal consumer protections to protect users’ funds when things go wrong on decentralized financial platforms. “High risk, high reward” is the general motto of the DeFi ecosystem. For those who have lost their savings due to these crypto lending platforms, there is no way to recover the losses.

But Shehan Chandrasekera, a chartered accountant, tells CNBC that the U.S. tax code may offer some relief to these investors in the form of an obscure deduction.

“If your funds become completely worthless and irrecoverable, you may be eligible to write them off as a non-profit bad debt,” said Chandrasekera, lead tax strategist at, a digital currency tax software company that helps clients track their crypto to virtual wallet addresses and manage their tax obligations.

“It won’t cover all of your economic losses, but it will give you some tax relief because you can at least write off that initial investment that you made,” Chandrasekera.

How can you claim

You can think of non-profit bad debt as a type of loss resulting from a debt transferred to another party that has become completely worthless and unrecoverable.

CPA Lewis Taub emphasizes that there must be a total loss of whatever was loaned to the platform for the debt to be considered deductible. Partial losses do not count. Account freezes or limited withdrawals by crypto platforms are not a total loss.

At this stage, many crypto platforms are still calling the freeze “temporary” as they figure out how to preserve some liquidity by restructuring or obtaining additional credit lines.

Chandrasekera says a debt falls into the “totally uncollectible” category only after all collection efforts have failed. Therefore, from a technical point of view, none of the crypto deposit funds on these platforms are completely useless.

“It is also considered useless if the borrower files for bankruptcy and the debt is discharged,” Chandrasekera the tweets thread explains detailing how submissions may claim a deduction.

Still, Taub says that even if a platform files for bankruptcy, the owners can still get something in bankruptcy court, so it’s still not a total loss. For example, Voyager Digital filed for Chapter 11 bankruptcy Tuesday night, but it’s unclear whether users will be able to recoup some of their losses through the process.

Determining whether the money you have given to a crypto platform is a loan is not always easy. For example, cryptocurrencies and stocks, which are considered non-debt instruments, are not subject to this write-off.

“In order to have a non-business problem debt, there must be an actual debtor-creditor relationship. So, to the extent that crypto was lent to the platform, the criteria is met,” said Taub, director of tax services at Berkowitz Pollack Brant, one of the largest public accounting firms in Florida.

Let’s take Celsius. Its terms state that any digital asset transferred to the platform constitutes a loan from the Celsius user.

However, not all platforms are so transparent in their terms. According to Chandrasekera, neither Voyager nor BlockFi accurately describe the user’s relationship with the platform.

That’s why CPAs are advising those affected by crypto platform suspensions to contact a financial advisor to see if their investments qualify.

“You need to talk to a counselor and see, ‘Okay, what’s my relationship? Does it look or smell like debt?” Chandrasekera continued.

“Because if you’re earning something like a reward, you can claim that it’s interest income that you’re getting,” he said. “So on those platforms, you have to go one by one and see what kind of relationship you have with the platform.”

Deduction requirement

If a crypto-lending platform meets the above criteria, a person can report the original value of the cryptocurrency (ie cost basis) when it was first lent to the platform as a short-term capital loss.

Let’s take the case of a hypothetical crypto investor named Dan who bought $10,000 worth of Bitcoin in 2020. In 2022, Dan lent the same Bitcoin, now worth $50,000, to a DeFi platform, offering him 15% APY on his Bitcoin. That platform then suffers insolvency and goes upside down, rendering Dan’s debt completely worthless. In that case, says Chandrasekera, Dan will be able to claim his foundation $10,000 in bad debt.

There are certain capital loss limitations to keep in mind, namely the fact that non-business bad debt is always considered a short-term capital loss.

So in Dan’s case, if he has no other capital gains (from stocks or other crypto investments) for this tax year, Chandrasekera says that of the $10,000 in total non-profit debt, he could deduct $3,000 this year and carry it forward balance of $7,000 to offset future capital gains.

As for the actual reporting mechanisms for non-commercial bad debt, the deduction is on Form 8949 as a short-term capital loss. This is where the user also stores their crypto and stock profits and losses.

Chandrasekera notes that you should also attach a “bad debt statement” to the return, which also explains the nature of that loss. Among other details that should include “the efforts you made to collect the debt and why you decided the debt was worthless.” according to the IRS.

The IRS warns that if you later repay or collect some of the bad debt you’ve deducted, you may have to include it in your gross income.

“Wash Sale Rule”

Taub says that these days — to the extent that there are potential losses on actual crypto holdings — he advises clients to take advantage of the fact that “wash sale” rules don’t apply to crypto. He tells CNBC that investors should really monitor their portfolio to consider “harvesting losses” to offset capital gains from other investments.

According to former Onramp Invest CEO Tyrone Ross, because the IRS classifies digital currencies like bitcoin as property, losses from crypto holdings are treated much differently than losses from stocks and mutual funds. For crypto tokens, the wash sale rules do not apply, which means you can sell your bitcoin and buy it back right away, while with stocks you have to wait 30 days to buy it back.

This nuance in the Internal Revenue Code is very important for US crypto holders, primarily because it paves the way for the collection of tax losses.

“One thing that savvy investors do is to sell themselves at a loss and buy back bitcoins at a lower price,” Chandrasekera explained. “You want to look as poor as possible.”

The more losses you can accumulate, the better for the investor’s tax situation in the long run.

“You can carry forward an unlimited number of losses and carry them forward for an unlimited number of tax years,” Chandrasekera added.

Because the washout rule does not apply, investors can harvest losses in crypto more aggressively than with stocks because there is no waiting period.

“I see people doing it every month, every week, every quarter, depending on their qualifications,” he said. “You can collect so many of these losses.”

The accrual of these losses is how investors end up recouping their future gains.

If an individual is going to liquidate their crypto holdings, they can use those accumulated losses to reduce their capital gains tax liability to the IRS.

Fast crypto redemption is another key part of the equation. When timed correctly, buying on the dip gives investors the opportunity to get back up again when the value of the digital coin rebounds.

So, let’s say a taxpayer buys one bitcoin for $10,000 and sells it for $50,000. This person faces a $40,000 taxable capital gain. But if that same taxpayer previously had losses of $40,000 from previous crypto transactions, he would be able to recoup the tax he owes.

According to Chandrasekera, this is a strategy that is popular with CoinTracker users.

However, he cautioned that careful bookkeeping is essential.

“Without detailed records of your transactions and cost basis, you cannot justify your calculations to the IRS,” he warned.

WATCH: Bitcoin prices fall, the latest victim of the cryptozyme

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