‘Such an injustice’: IRS stands to gain most from FTX bankruptcy — at everyone else’s expense

‘Such an injustice’: IRS stands to gain most from FTX bankruptcy — at everyone else’s expense

The US Internal Revenue Service slapped a tax bill worth nearly $44 billion to the FTX and Alameda groups of companies, which gives the agency priority over customers who lost funds.

“It’s such an injustice,” J.W. Verret, a professor of securities law at George Mason Law School, told DL News. The US government is “cutting in line as a creditor.”

The IRS lodged 45 claims against the bankrupt companies, according to filings dated April 27 to 28. These claims fall under the “Admin Priority” status, which grants tax authorities the first right to payment in bankruptcy cases.

The IRS claims $12 billion and $8 billion in taxes for 2023 and 2022, respectively. The claim also asks for $122 million per quarter for payroll taxes. Alameda Research LLC, one of the several Alameda entities, faces the largest of the claims, at about $28 billion.

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The FTX and affiliated bankrupt companies had an approximately $6.8 billion gap in its balance sheet when it filed for bankruptcy last year, according to calculations by advisers in March.

In January, the advisers found more than $5 billion in various assets that it may be able to sell to help pay creditors. But that’s dwarfed by the $44 billion claimed by the IRS, which would eat up the claims if successful.

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In bankruptcy cases, however, there is often a discrepancy between the initial claims made by the IRS and the final payouts. Complex negotiations and legal processes frequently result in reduced settlements compared to the original claims.

During the 2008 financial crisis, Lehman Brothers, a once-prominent investment bank, faced an IRS claim of $1.2 billion. However, the final settlement reached between Lehman Brothers and the IRS amounted to a payout of only $370 million.

As the bankruptcy proceedings continue, the IRS anticipates receiving a more substantial payout — this time directly from taxpayers.

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Verret said the IRS is “also going to force customers to pay capital gains in the FTX trading despite those funds being stolen.”

That is due to the provisions of American tax law, which do not have exceptions that would allow people to write off stolen or lost crypto entirely as capital losses, said Verret. The capital loss deductions are limited to a usual maximum of $3,000.

If a trader earned $10,000 from a crypto trade, reinvested the proceeds into crypto, and subsequently lost assets in the FTX collapse, the person could potentially face a considerable tax liability, without the immediate ability to meet their tax obligations.

And now, any anticipated payout they were counting on may potentially be absorbed by the IRS, even before it reaches their hands.

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