How to Calculate Tax Losses from Crypto Exchange Bankruptcy (With Real Examples & Walkthrough)

Thanks for explaining this. Does it matter if I receive distribution in USD versus receiving actual crypto back? Also, I'm unclear how to handle the situation where I might have purchased the same type of coin multiple times at different prices. Do I need to specify which "lot" of coins was lost?

The form of distribution (USD or crypto) doesn't change the fundamental calculation, but it does affect how you document it. If you receive USD, that's straightforward to value. If you receive crypto back, you'd use the fair market value of that crypto on the date of distribution to determine how much of your basis has been recovered. Regarding multiple purchases of the same coin at different prices, this is where tax loss harvesting methods come into play. Most people use First-In-First-Out (FIFO) method for simplicity, meaning your oldest purchases would be considered the ones lost first. However, you could also use specific identification if you have detailed enough records to specify exactly which "lots" were on the exchange when it went bankrupt. Just be consistent with your approach across all your crypto transactions.

Does the software handle situations where you transferred crypto between wallets before it ended up on the bankrupt exchange? That's what's making my situation complicated - I bought on Coinbase, moved to a hardware wallet, then eventually transferred to the exchange that went bankrupt.

I'm skeptical about tax software specifically for crypto. How can it possibly keep up with all the changing regulations around crypto bankruptcies? The IRS barely knows how they want to handle this stuff yet.

The software handles wallet transfers perfectly - that's actually one of its best features. It can track your cost basis through multiple transfers across different wallets and exchanges, so you don't lose that important data. For me, it accurately tracked coins I bought on three different exchanges before they ended up in the bankruptcy. Regarding the changing regulations, that's exactly why specialized software helps. Their tax team stays on top of the latest IRS guidance and updates the platform accordingly. They've added specific features just to handle the bankruptcy distributions, which most general tax software completely misses. The regular tax programs just don't have the sophistication to handle crypto-specific events like hard forks, airdrops, and especially bankruptcies.

Wait, so this service just helps you jump the phone queue? How does that even work? Sounds like paying to cut in line at the grocery store.

I don't believe this for a second. I've been trying to get information for months and there's no way some third-party service can magically get you through. The bankruptcy administrators barely respond to court-ordered inquiries.

It's not about cutting in line - they use technology that continuously redials and navigates the phone tree until it gets through, then immediately connects you once a human answers. It saves you from having to manually redial dozens of times or wait on hold for hours. It's more like having a persistent assistant who handles the frustrating part for you. I was skeptical too, which is why I included the video link so you can see exactly how it works. The bankruptcy administrators do have phone support - the problem is getting through their overwhelmed system. I spent three days trying before using this service. Within 20 minutes of using Claimyr, I was talking to an actual representative who verified my claim status and emailed me the documentation I needed for my tax records.

Great question about the interest earnings! You're absolutely right that they need to be handled differently. Here's how to approach it: Your original 2 ETH has a cost basis of $4,000. The 0.3 ETH you earned as interest has a cost basis equal to the fair market value at the time you received it (which you already reported as income). Let's say that was $600 total across all interest payments. Your total cost basis would therefore be $4,600 ($4,000 for your principal + $600 for the interest you were previously taxed on). When calculating your capital loss, you'd use this total figure and subtract any distributions you receive. This approach ensures you're not double-taxed on the interest income and allows you to properly claim losses on both your principal and the previously taxed interest earnings.

Thank you so much for explaining that! I was getting confused because my tax software from last year showed the interest as income, but I wasn't sure how to handle it now that it's been lost. So if I understand correctly, I should add up all the interest I reported as income over the years (which I can find on my old tax returns), and add that to my original cost basis? Then use that combined number when calculating my loss minus any distributions?

Even small losses are worth claiming! Capital losses can offset any capital gains you might have from other investments (stocks, property, other crypto), which could save you a lot in taxes. Even if you don't have capital gains, you can deduct up to $3,000 of capital losses against your ordinary income each year. So your $600 loss could potentially reduce your taxable income by $600, which might save you $132 in taxes if you're in the 22% tax bracket. Not huge, but definitely worth the few minutes it would take to report it correctly.

Thanks for that explanation! I didn't realize I could use it to offset my regular income too. I do have some stock investments that had gains this year, so I'll definitely claim the crypto loss to help balance those out. One last question - do I need any special forms or documentation to claim this loss on my taxes? Or do I just report it as a capital loss on Schedule D?

You'll report it on Schedule D as a capital loss, just like any other investment loss. The key is making sure you have proper documentation - keep records of your original cost basis (what you paid for the crypto), any distributions you've received, and documentation from the bankruptcy proceedings showing the loss. Since you've already received $200 in distributions, you'll want to wait until you know whether more distributions are coming before claiming the full loss. If the bankruptcy court has indicated no further distributions will be made, then you can claim the remaining $600 as a capital loss for 2024. If there's a chance of additional distributions in 2025, you might want to be conservative and only claim a partial loss this year. The good news is that even if you have to spread the loss across multiple years as distributions come in, you can still benefit from the tax savings each year.

Great questions about staking rewards and pending orders! For staking rewards, you'll handle them exactly like the interest situation Jessica explained earlier. Since you already paid taxes on those rewards as income when you received them, they become part of your cost basis for the loss calculation. So if you received $500 in staking rewards over time and paid taxes on that amount, you'd add that $500 to your original investment amount when calculating your total loss. For the pending trades/limit orders that never executed - those shouldn't factor into your loss calculation at all. Since the trades never completed, you still technically owned the original crypto assets you had deposited, not whatever you were trying to trade for. Only include the actual assets that were in your account when the exchange froze. The key is to think of your loss as: (Original cost basis of all assets + Previously taxed earnings like staking rewards) - (Any distributions received or expected). This ensures you're not getting double tax benefits or missing deductions you're entitled to.