In recent years, several trading platforms where users have stored their cryptocurrencies have gone bankrupt. The consequence is that you temporarily lose access to your cryptocurrencies and may ultimately lose them. In a recent decision, the Danish Tax Council has dealt with the tax implications of this, which we explain in this news item.
It's probably not news to cryptocurrency traders that there are risks associated with storing your cryptocurrencies on centralized platforms. The risk has materialized as a recurring event since 2014 when Mt.Gox went into receivership. The same has recently happened to platforms such as FTX, Celsius, Voyager and BlockFi. What they all have in common is that they offered their customers to store their cryptocurrency holdings. However, when platforms go into bankruptcy for various reasons, a number of legal questions arise, and in a recent decision, the Danish Tax Council has assessed the tax implications.
When a platform goes into bankruptcy, its customers have a claim against the bankruptcy estate corresponding to the cryptocurrency they had stored on the platform at the time of the bankruptcy proceedings.
In most jurisdictions, there is a counterpart to the rules on separatist claims under section 82 of the Bankruptcy Act, according to which you have the right to have what belongs to you handed over without it being included in the bankruptcy estate. A condition for this is that your cryptocurrency holdings are separated from other cryptocurrency holdings.
However, for all platforms that have been placed in bankruptcy proceedings, it has been the case that the customers' deposits have not been separated and have been included in the company's balance sheet. This means that the customer's claim is included as a mass claim and thus not a separatist claim. This means that you cannot immediately receive the cryptocurrency that belongs to you, but must wait until after the trustee has finalized the bankruptcy estate.
The processing of bankruptcy estates involving cryptocurrency trading platforms is complicated and has historically taken many years to process. If you have stored cryptocurrency on a trading platform that has gone into bankruptcy, you should therefore expect a number of years to pass before you might get your cryptocurrency back. Whether you get your cryptocurrencies back is an independent question, as they are part of the estate's bankruptcy estate, and the costs of the estate administration must therefore be deducted from these funds.
It's important to emphasize the importance of filing your claim in the bankruptcy estate.
As soon as the trading platform is placed under bankruptcy proceedings, one's cryptocurrency holdings are legally transferred to constitute a claim against the bankruptcy estate. It is worth noting that in the decision, the Tax Council states that the transfer in itself is not a taxable realization of the cryptocurrencies in question, as they were acquired for speculative purposes. In that case, a loss deduction can only be obtained under the State Tax Act if the loss is due to a trade or if the loss can be equated with a trading loss.
However, if the claim against the bankruptcy estate is denominated in a fiat currency such as USD or EUR, the claim can instead be treated according to the Danish Capital Gains Act. The Tax Council thus assumes that because the claim in the decision is stated in USD, it constitutes a monetary claim that can justify a right of deduction.
However, the right to deduct is only obtained when the bankruptcy estate is finally settled. The reason for this is that it is only at this point that it is determined whether there are any dividends to customers, and you can therefore calculate the size of your loss and thus also deductions.
It can be problematic for some to have significant wealth "locked up" in a bankruptcy estate where there is little prospect of any dividends, but where you only get a deduction right after a number of years.
However, you can "force" a loss - and thus a right to deduct - by selling your claim to a third party. In the case of both Mt.Gox and FTX, there have been professional companies that have offered the bankruptcy estates' customers to buy their claims in exchange for the claim being transferred to these companies. The Tax Council confirms that such a sale will trigger a deduction, provided, of course, that it is a loss that can be documented to the Danish Tax Agency.
We certainly do. There are good reasons to believe that the cause of FTX's bankruptcy was due to fraud, not lack of financial regulation. However, on December 30, 2024, MiCA comes into force and will apply to all trading platforms in the EU and platforms that offer trading activities to customers in the EU. MiCA contains several rules, compliance with which will prevent MiCA-covered companies from ending up in the same situation as, for example, FTX. Firstly, there are strict requirements to separate client funds from company funds, and secondly, there are requirements to have policies in place for winding up the company. The latter is intended to avoid a disproportionate financial burden on customers in the event of bankruptcy.
The Tax Council's decision can be read here.
As Denmark's only specialist office within cryptocurrency, Samar Law has extensive experience in advising on matters concerning the tax treatment of cryptocurrency. If you want advice on taxation of cryptocurrency, we encourage you to contact lawyer Payam Samarghandi at payam@samarlaw.dk or mobile 60793777 for a non-binding conversation.
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