With the recent news of the crypto giant, FTX, filing for Chapter 11 bankruptcy, you may be left wondering what this means and whether you will be able to deduct the losses or not. It is likely that consumers will incur deductible losses on their tax returns, however, these losses will not be recognizable until 2023 at the earliest or whenever the court has completed its final ruling.
In a Chapter 11 bankruptcy, the debtor, in this case, FTX, will continue daily operations while reorganizing its debt. FTX intends to continue salvaging its business. FTX has until early March to submit its plan for reorganization, the plan will then be voted on by creditors for approval and subject to the subsequent court ruling. It is not clear at this time how many creditors will be asked to participate in the approval process, it may prove difficult to track down some customers.
Customers should not claim a nonbusiness bad debt loss until it is determined by the court if unsecured credits will be receiving some sort of payout. To claim a nonbusiness bad debt write-off, assets must be completely worthless and unrecoverable. The formula to determine the loss amount incorporates the cost basis and the reasonable expected recovery value which customers will not know or be able to calculate until next year at the earliest and likely not until after 2023. It is recommended that customers take a conservative approach to their finances and not expect to get anything back at all after a Chapter 11 plan is approved.