Celsius, a once high performing global crypto platform, has filed for Chapter 11 bankruptcy in the US. With the initial shock over, many Australian investors are now asking if they can at least claim the tax loss on their Celsius investments?

Update - pure custody account withdrawals

5 June 2023

Customers who held assets in specific custody accounts can now withdraw their funds. Instructions on who this applies to and how to complete the withdrawals can be found here. Unfortunately, most Australian customers did not have access to custody accounts. You can log in to the Celsius app to view if you had any balances that were held in a custody account and may be eligible to withdraw.

Celsius and its plunge into bankruptcy

After months of battle with insolvency issues, the impact of the collapse of major crypto terraUSD and LUNA, alongside extreme market conditions, the giant crypto lender was forced to initiate bankruptcy proceedings on the advice of restructuring experts on 13 July 2022.

When a company files for bankruptcy, creditors take control of the company. If you are a user of the bankrupt platform, you are now likely to be considered an unsecured creditor and when the company assets are liquidated, you may eventually receive some payout based on the amount you are owed.

At the time of bankruptcy filing, Celsius had $5.5 billion in total liabilities, of which $4.7 billion was owed to unsecured creditors.

In the US, Chapter 11 bankruptcy has the following priority order to which creditors are paid out.

  • Secured creditors
  • Unsecured creditors
  • Equity holders.

So, where does this place the thousands of Australian investors who now have their assets locked on Celsius as unsecured creditors of the company? And can Australian investors claim a tax loss on Celsius investments?

Celsius bankruptcy proceedings timeline

The world is watching to see how the US Court will navigate the issue of asset ownership in the now bankrupt Celsius platform, particularly in light of other recent collapses of FTX Trading Ltd, BlockFi and Voyager Digital Ltd.

The timeline of events in the Celsius bankruptcy proceedings are:

⚖️ On 5 October 2022, Celsius filed their Schedule of Assets and Liabilities with the Court, including what they believe the users’ account balances were on 13 July 2022. Users who disagree with the balances listed in the Schedule, are able to submit their own proof of claim.
⚖️ On 24 October 2022, the Court approved the sale motion for Celsius to set bidding procedures for the auction and sale of their assets. Final bid for the Celsius platform assets is due on 12 December 2022, with a sale hearing set to take place on 22 December 2022.
⚖️ On 16 November 2022, the Court set a bar date order, where creditors who are not in agreement with the balances filed by Celsius, must file their proof of claim forms by 3 January 2023. After the bar date, Celsius will reconcile all filed claims and allowed claims will receive distributions as provided for under the bankruptcy proceedings.

Celsius bankruptcy key outcomes

As part of the scheduled Court hearings in December 2022, the Court has made the following progress on the case:

⚖️ The Court approved the sale of Celsius’ self custody platform asset GK8 to Galaxy Digital Trading LLC, as the only qualified bidder.
⚖️ The Court ruled that Celsius will return crypto worth $50 million back to users who held non-interest bearing custody accounts. Effectively returning amounts to users where ownership was clear and not co-mingled with other Celsius assets.
⚖️ The Court is yet to rule on the ownership of Celsius earn accounts and withhold accounts.

One of the most important outcomes of the proceedings will be in determining the ownership status of Celsius accounts. The Court will determine whether the assets deposited on Celsius belong to the users, or whether the assets deposited belong to Celsius. This decision will be critical in determining the order that creditors are paid out.

Current state of the Celsius bankruptcy

Although the case has moved forward with the recent ruling issued by the US Court judge on user custody accounts, we still don’t have clarity on Celsius earn accounts, which account for the majority of the $4.7 billion user funds that are currently locked up.

Celsius earn accounts are the interest bearing accounts where the majority of users had deposited crypto assets with Celsius to earn interest on the deposited assets.

There are also withhold accounts, that are similar to custody accounts where the assets deposited did not earn interest. Withhold accounts were only used by people residing in places such as New York, where Celsius was not authorised to provide custodial services.

The US Court is currently considering whether the earn and withhold accounts form part of the Celsius bankruptcy estate. In other words, the legal test of who truly owns those assets in the trading platform is a key pending consideration.

Although, each situation is dependent on its own facts, the outcomes of the Celsius case will also impact many similar bankruptcies, such as FTX, and set a premise for future crypto bankruptcy cases.

Can Australian investors claim a capital loss on Celsius

Under Australian tax law, investors are allowed to claim a capital loss when a CGT asset you own is lost or destroyed. However, where there are ongoing insolvency or bankruptcy proceedings, the amount that is lost, if any, is not yet known.

The ATO has guidelines on what requirements need to be met in order to claim crypto assets as a capital loss, and the ATO requires reasonable certainty on what amounts can be recovered, if any.

According to the recent Court ruling in the Celsius case, creditors who had their funds in custody accounts, may potentially receive their entire amount back. Some of those creditors may end up with no lost amount, and subsequently no amount can be claimed as a loss.

If the Court determines that the Celsius accounts belong to the creditors, then creditors may be able to get a portion or all their assets returned. However, if the accounts are ruled to belong to Celsius, those users will be unsecured creditors and will be near the back of the queue for receiving a payout.

With the current state of the Celsius bankruptcy proceeds, we are not at the point of having reasonable certainty around the lost amounts. That means the majority of Australian crypto investors will not be in a position to claim a capital loss for their crypto trapped on Celsius.

If you want a deeper understanding of how we came to this conclusion, our tax team went into the tax law in detail when they recently considered the FTX insolvency, Can I claim my FTX loss.

What should you do next?

While most of us won’t be able to do more than just sit and wait, there are a few things coming up in the Celsius bankruptcy that are worthwhile to know:

  • Celsius has set a timeline for the auction and sale of its assets, with a final sale hearing deadline of 22 December 2022.
  • Celsius is trying to claw back $7.7 million from Voyager Digital’s estate, as both companies wrangle with their own bankruptcies. Celsius, who was too caught up in their own legal case, is now seeking an extension to file a claim against its fellow crypto lender for what they believe is part of their estate. Voyager, held interest bearing earn and transitional withhold accounts with Celsius.
  • As Celsius’ legal proceedings continue, the Court is yet to decide on whether funds from earn and withhold accounts belong to the company Celsius, or to its users.

Key takeaway

With the Celsius bankruptcy proceedings still underway, Celsius creditors can not know with reasonable certainty if any of their crypto balances are recoverable. Australian investors should not claim a capital loss until proceedings are concluded or an official ruling is provided.

FAQ

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References

Wikipedia, Celsius Network, accessed 14 December 2022.

United States Bankruptcy Court, Southern District of New York, Celsius Network LLC, Case No. 22-10964 (MG), accessed 14 December 2022

Stretto, Celsius Network LLC, Case Number: 22-10964, Schedules of Assets and Liabilities, accessed 14 December 2022.

The National Law Review, Celsius Bankruptcy Case Update: November 18, 2022, accessed 14 December 2022.

Stretto, Celsius Network LLC, Case Number: 22-10964, Notice of Successful Bidder, accessed 14 December 2022.

Reuters, Galaxy wins bid for collapsed crypto lender Celsius' GK8 unit, accessed 14 December 2022.

Reuters, Celsius bankruptcy judge orders return of some crypto assets to customers, accessed 14 December 2022.

Australian Taxation Office, Loss or theft of crypto assets, last updated 29 June 2022.

CoinDesk, Celsius Seeks $7.7M From Voyager's Estate as Bankruptcy Cases Intertwine, accessed 15 December 2022.

Disclaimer

The information in this article reflects our understanding of existing legislation, proposed legislation, rulings and other tax law, as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way.

The information provided in this article is purely factual in nature and does not constitute tax advice, financial product advice or legal advice. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances. If you require professional advice that takes into account your particular circumstances, you should consult an appropriate professional.

Last updated
11
Nov
2023
Author
Maryna Kovalenko
Tax Co-Founder
Brisbane, Australia
Reviewed by
Kova Tax
Registered Tax Agent
25963822