Bitfinex, one of the more popular Bitcoin and digital-currency exchanges, recently suffered a security breach where they reported nearly 120,000 Bitcoins were stolen, a loss of around $70m.
While they are working on restoring their operational website, initially with limited functionality, they have already decided on the approach for their losses - a bail-in from their customers.
After much thought, analysis, and consultation, we have arrived at the conclusion that losses must be generalized across all accounts and assets. This is the closest approximation to what would happen in a liquidation context. Upon logging into the platform, customers will see that they have experienced a generalized loss percentage of 36.067%
There will be a flat 36.067% loss taken across all accounts and assets. This will be done by replacing the loss with a new BFX token. Although it cannot be traded or sold, Bitfinex claim they are working on a process where it could be exchanged for shares in iFinex Inc in the future.
Daniel Winters, a Bitcoin-knowledgeable tax accountant at Global Tax Accountants in the US, recently posted how these losses affect US taxpayers.
For US persons reporting the loss on their tax return, the basic question is whether this will be a capital loss, or a theft/casualty loss.
Daniel described the two mechanisms for claiming losses, capital losses and casualty losses, each with their own rules. For most investors, capital losses will generally be in their best favor since the whole loss is the cost basis of the coins. It is much like those coins were sold off for $0 USD.
The good news is that capital losses can be used to offset any gains in that tax year, but not all of the excess losses can be claimed immediately. While losses can be used to reduce taxable income up to $3,000 per tax year, any balance will be carried forward into future years.
Casualty losses are only deductible above 10% of your Adjusted Gross Income (AGI) and must be taken in the same year. Unfortunately, this often means that small losses are simply ignored.
Given the new information that 36% of all account assets will now be exchanged for BFX tokens, it can more easily be taken as a capital losses. The digital currencies (e.g. BTC, ETH and LTC) will be traded for a number of BFX. Since this is a tax event, and given that BFX has no value, you are in effect selling coins for a $0 price. The capital loss is therefore the original cost-basis of those coins.
Bitcoin.tax is the leading capital gains tax calculator for Bitcoin, Ethereum and other digital currencies. If you sign up for a free account we can help calculate those losses ready for your 2016 taxes. Once Bitfinex account access has been restored, we will work to ensure that any BFX tokens in your account are recorded as appropriate trades so that any losses you incurred can be correctly reported.