Disclaimers: USA Only | Guide is For Celsius Earn Accounts | Do Your Own Research

Introduction

The Celsius bankruptcy has impacted hundreds of thousands of people. While many are happy to have received distributions, the tax impact is quite complex. I have scraped the internet looking for a reputable and comprehensive guide detailing exactly how to handle the distributions. To my surprise, I have not found a guide that is both reputable and comprehensive. All reputable guides are over simplified, gatekeeping the actual details of the complex calculation, and all detailed guides are generally not reputable and contain errors.

I'm here to set the record straight and provide an in-depth guide to calculating the tax impact of the Celsius bankruptcy and subsequent distributions based on my interpretation of the guidance. This will be a long post, but will contain the granular details needed for any of you looking to perform this calculation on your own.

For context, my name is Justin and I am a CPA specializing in crypto taxation. Without further adieu, let's begin.

Ponzi Scheme vs Capital Loss Route

There are two options for claiming a loss here. (1) Ponzi scheme loss and (2) Capital loss.

1. The Ponzi Scheme Loss results in 75% of your cost basis of assets lost being claimed as a loss in 2023, with 25% being reserved to offset future distributions of any assets reclaimed. Any distributions received in excess of that 25% reserved will be taxed as ordinary income. This calculation is very simple, however requires that you claim it this year. So unless you are on extension, it may be too late. Additionally, this route comes with a major risk. About 50% of returns that claim a Ponzi scheme loss are subject to audit. Sometimes the risk is worth the benefit, but in many instances its not.
2. The Capital Loss route is a much more complicated calculation, however does not have the extra audit risk. Any loss due will be claimed in 2024 and future years where distributions are made (or it's finalized that no further distributions will be made).

For purposes of today's post, I will be focusing on the Capital Loss route and how to calculate the tax impact of the distributions given that the majority of people will fall into this bucket and likely haven't begun to think about this calculation yet since it won't be required to be made until 2024 tax filing in April 2025.

Understanding Your Claim Value

Your claim value is based on (1) the crypto assets lost (type and amount), (2) the values of the tokens at 8:10 PM ET on 7/13/2022 per the bankruptcy document, and (3) whether or not you opted out of the class action settlement.

Take all your lost tokens and multiply the amount by the values in the above screenshot. This is your initial claim value. Unless you specifically opted out of the class action settlement, your claim will automatically receive a 5% mark up. So if you did not opt out of the class action settlement, multiply your initial claim by 1.05. This is your final claim amount that your distributions will be based off of.

Distribution Payout Structure

Now that you know your claim value, we can begin to understand the distributions received. Celsius hopes to distribute 79.2% of each person's claim amount, leaving 20.8% of your claim likely unrecoverable. The breakout of how these distributions will be split is below.

• ~28.95% – to be paid out in BTC (some will receive slightly less/more BTC than ETH)
• ~28.95% – to be paid out in ETH (some will receive slightly less/more ETH than BTC)
• 14.9% – to be paid out in Ionic Stock
• 6.4% – to be paid out in an unknown disbursement (from sale of illiquid assets)
• 20.8% – likely unrecoverable

The BTC, ETH, and Stock distributions are to occur in 2024, with the "effective date" set as 1/16/2024. This date is the date used in determining the fair value of the distributed assets. The following values must be used in the calculation for the received BTC, ETH, and stock.

• BTC = $42,973/BTC
• ETH = $2,577/ETH
• Stock = $20/unit

The remaining 6.4% distribution date is unknown. It could be in 2025, or it could be in a decade. The additional 20.8% that is likely unrecoverable won't be factually established as unrecoverable until the court proceedings are finalized, which again could take a decade.

Understanding Your Maximum Loss

Before we get into the actual calculation, it's important to nail down the concept of your maximum loss. This is high level and just to set the fundamentals before getting into the details. Taking a step back, your maximum loss is equal to the cost basis of assets lost. Period. Your max loss will never be more than your cost basis (the fair value of assets lost does not influence your maximum loss).

Your maximum loss is not the same as your claimable loss. The maximum loss is just a starting point. The fair value of any assets subsequently received in a distribution will decrease this loss. In other words, if no distributions were made, the loss you can claim is equal to your maximum loss aka the cost basis of the assets lost. The formula is simple. Maximum Loss – Fair Value of Distributions = Claimable Loss.

Let's use an example.

Example: Cost basis of assets lost (maximum loss) = $500. In total, you receive distributions totaling $200 in fair value at the time. The loss you can claim is… $500 – $200 = $300 claimable loss. This concept should hopefully be fairly straight forward.

What if the fair value of what I received is more than the cost basis of assets lost? In a scenario like this, you actually have a gain on the distribution.

Let's look at another example:

Example: Cost basis of assets lost (maximum loss) = $100. In total, you receive distributions totaling $200 in fair value at the time. Using the same formula… $100 – $200 = -$100 aka a $100 GAIN.

In the above scenario, since you received assets worth more than the cost basis of the assets lost, you actually are in a gain position. This is common for those who bought crypto early on and simply held for a long time. It's important to note, the amount of crypto lost vs received is irrelevant, it is solely based on the dollar value of cost basis vs dollar value of distribution.

Understanding Taxable Event Timing

Now that we have the fundamentals down for your maximum loss vs your claimable loss (or gain), we need to dive deeper into the timing of when these losses/gains need to be recognized.

Simply put, a taxable event only occurs when a distribution is made (or its determined no more distributions will be made). Therefor, the gains/losses will be recognized when (1) the 2024 distributions were made, (2) the 6.4% distribution from the sale of illiquid assets is made at some time in the future, and (3) when the court proceedings finalize and it is factually established the 20.8% remaining amount will not be recovered.

Understanding Forced Liquidation

When Celsius went bankrupt, all assets on the platform were frozen. No withdrawals or trades could be made. For ease of understanding, you can imagine these assets simply sat locked up in a wallet doing nothing at all. In order to fund the distributions of BTC, ETH, and stock (and any future distributions), these assets will be sold. This is known as a "forced liquidation". However, for tax purposes, until that point they simply sit untouched. This is why the taxable event does not occur until the distribution is made as the forced liquidation does not occur until that point.

Understanding Non Like-Kind Distributions

While many people lost BTC and/or ETH on Celsius, there are some who held neither on the platform. Since they did not hold BTC or ETH, receiving the BTC and ETH (and stock) would be considered a non like-kind distribution and result in a forced liquidation (taxable event). In these scenarios, the calculation is quite a bit easier than the scenarios where a user held BTC and/or ETH.

Before we get into the nuances of distributions of like-kind assets, let's do a high level break down of how to calculate the loss/gain realized when a user did not hold either BTC or ETH.

Using the percentages from the "Distribution Payout Structure", allocate your total cost basis of lost assets to each. For example, 28.95% of your total cost basis should be allocated to BTC, 28.95% of your total cost basis should be allocated to ETH, 14.9% of your total cost basis should be allocated to Stock, 6.4% of your total cost basis should be allocated (reserved) for the future distributions from the sale of illiquid assets, and 20.8% of your total cost basis should be allocated (reserved) for the likely unrecoverable amount (yes, this means that amount won't be able to be recognized as a loss until the court proceedings complete, which could be years).

Now that you have allocated your total cost basis of lost assets to each of the distribution categories, you can begin to calculate the loss/gain recognized for the 2024 distributions by using the formula mentioned in the "Understanding Your Maximum Loss" section.

Let's look at an example.

Assume the only asset you lost was 1,000 USDC on Celsius with a cost basis of $1,000. Your claim value is $1,050 (5% markup for not opting out of the class action settlement). Of that cost basis, $289.5 is allocated to BTC distribution, $289.5 is allocated to ETH distribution, $149.5 is allocated to Stock distribution, $64 is reserved for future distribution from sale of illiquid assets, and $208 is reserved for the amount that is likely unrecoverable (and can only be claimed once proceedings finalize). In 2024, you receive $303.98 worth of BTC (28.95% x $1,050), $303.98 worth of ETH (28.95% x $1,050), and $160 worth of Stock (14.9% x $1,050, rounded to nearest share). In this scenario, you actually have a gain. Below is the calculation.

• BTC Distribution: $303.98 FMV – $289.5 cost basis = $14.48 capital gain in 2024
• ETH Distribution: $303.98 FMV – $289.5 cost basis = $14.48 capital gain in 2024
• Stock Distribution: $160 FMV – $149.5 cost basis = $10.5 capital gain in 2024

To summarize, the loss/gain calculated for each distribution is equal to the fair market value of the assets received (using the effective date price) minus the cost basis allocated to that distribution.

Understanding Like-Kind Distributions

As mentioned above, most people held either BTC or ETH on Celsius at the time of bankruptcy in addition to other assets. Given the fact that part of the distribution was made "in-kind", a forced liquidation does not actually occur. In other words, if you had BTC and/or ETH stuck on Celsius, and since part of the distribution is being paid in BTC and ETH, the amount returned can be viewed as simply a transfer off of Celsius with no forced liquidation (and thus no taxable event). With that said, this is where the calculation can get quite complex.

There are a few things to consider here.

• How much BTC was stuck on Celsius? How much BTC was received in the distribution?
  • If you received more BTC than what was lost, the full amount of BTC lost is considered a transfer and the excess amount will require a forced liquidation calculation.
  • If you received less BTC than what was lost, only the amount returned is considered a transfer and the remaining BTC lost on the platform will be used in forced liquidation calculations for other assets.
• How much ETH was stuck on Celsius? How much ETH was received in the distribution?
  • If you received more ETH than what was lost, the full amount of ETH lost is considered a transfer and the excess amount will require a forced liquidation calculation.
  • If you received less ETH than what was lost, only the amount returned is considered a transfer and the remaining ETH lost on the platform will be used in forced liquidation calculations for other assets.
• When receiving less BTC and/or ETH than what was lost, you'll have some flexibility in deciding which tax lots to assign to the returned BTC/ETH and which tax lots should be left for forced liquidation. For example, say you lost 3 ETH with cost basis of $1k, $2k, and $3k accordingly. Only 1 ETH was "returned" to you and the others will be used for forced liquidation. For the ETH returned to you, you need to chose which cost basis of either $1k, $2k, or $3k should be assigned to the returned ETH and the remaining to be used for forced liquidations.

For simplicity sake, the BTC/ETH received will fall into one of two buckets, "Returned" or "New". These names will be important to continue following along.

1. "Returned" BTC/ETH refers to BTC/ETH that was previously held on the platform but has now been returned. The maximum amount of "Returned" BTC/ETH is the full amount that was lost on the platform, however the "returned" amount can be less than the amount lost on the platform in scenarios where you receive less BTC/ETH than what you had lost.
2. "New" BTC/ETH refers to BTC/ETH received in distribution that is in excess of the amount lost. So if you didn't hold any BTC or ETH, then the amount you receive is 100% "New".

Calculating Loss/Gain On Distributions

If you've made it this far, then you're almost there. However, this is the most complicated step but hopefully with a few examples you'll be able to follow along.

In order to calculate your loss/gain on the distributions, I've created the step-by-step process below.

1. Identify "Returned" BTC and ETH vs "New" BTC and ETH
   • Again, at the maximum the "Returned" BTC/ETH will be equal to what was lost. Anything received in the distribution in excess of what you lost will be "New".
2. For "Returned" BTC/ETH, Identify Cost Basis Returned
   • If you receive 100% of the BTC and/or ETH that you initially lost, then allocate 100% of the cost basis of the BTC/ETH to the returned amount. It's as if that crypto just sat idle for 2 years, keeping the same cost basis.
   • If you receive less than 100% of the BTC and/or ETH that you initially lost, then you will need to determine the cost basis for the returned amount (it can't just be 100% of what was lost and it also can't just be a percentage of what you received vs what was lost). Refer to the example in the "Understanding Like-Kind Distributions" section. If you want to use the cost basis in line with your cost basis accounting method, the easiest way to do this would be to simulate a sale in Koinly of the amount returned to and assign the cost basis from that to the amount "Returned".
3. Identify Remaining Cost Basis to be Allocated
   • After identifying the cost basis associated to the "returned" BTC and ETH, we need to calculate the remaining cost basis to be allocated. Use this formula: Total Cost basis of all assets lost – cost basis of "returned" assets = remaining cost basis to allocate.
4. Determine Starting Percentages for Allocation for Remaining Categories
   • There are 5 categories. The "New" amounts require a simple calculation to determine starting percentages, whereas the remaining catagories don't require a calculation. The 5 categories are as follows….
     • BTC "New" Starting Percentage = ("New" amount received / Total amount received) x 28.95%
     • ETH "New" Starting Percentage = ("New" amount received / Total amount received) x 28.95%
     • Stock Starting Percentage = 14.9%
     • Illiquid Asset Recovery Starting Percentage = 6.4%
     • Likely Unrecoverable Starting Percentage = 20.8%
   • To solidify some knowledge here, going back to the "Understanding Non Like-Kind Distributions" section, if you did not lose any BTC or ETH on Celsius, then the received amounts for each would both be 100% "New" and thus result in the starting percentage for allocation would be the full 28.95%.
5. Calculate the Final Percentages for Cost Basis Allocation
   • Sum together all of the "starting percentages" calculated above. Hint, unless you didn't lose any BTC/ETH on Celsius, then these won't sum to 100%.
   • Now calculate the final percentage of each of the 5 categories by taking each category's starting percentage and dividing by the sum of all the categories. The formula is as follows… Category Final Percentage = Category Starting Percentage / Sum of All Category Starting Percentages.
   • The remaining percentages are now the final percentages to be used in allocating the remaining cost basis
6. Allocate Remaining Cost Basis
   • Using the "final percentages" calculated in step 5 (which should now all sum to 100%), allocate the remaining cost basis calculated in step 3.
   • If done correctly, the "returned" BTC and ETH will have the cost basis of the initial amounts lost on the platform as determined in Step 2, and the remaining cost basis will be allocated across the other 5 categories as determined by as determined in Steps 3 – 5. All the cost basis has now been assigned which will be used in determining any loss or gain to be realized on the distributions.
7. Calculate Loss/Gain on Distribution
   • For the "Returned" BTC and ETH, there is no taxable event and thus no loss or gain recognized at that time. As expressed previously, the "returned" amounts just keep the cost basis as if they just sat idle for 2 years and will only have a gain or loss once sold.
   • For the "New" BTC/ETH and Stock received in 2024, calculate the fair value using the prices on the effective date discussed in the "Distribution Payout Structure" section above. Take the amount of crypto and stock received and multiply it by those amounts to determine total proceeds.
   • Take the total proceeds of the "New" BTC, ETH, and Stock received and subtract out the cost basis allocated to each as determined in Step 6. If the proceeds (FMV) of what was received is more than the cost basis allocated, then you actually have a capital gain on that distribution. If you the proceeds (FMV) of what was received is less than the cost basis allocated, then you have a capital loss on the distribution.
8. Cost Basis Reserved for Future Distributions
   • There are two categories that had cost basis assigned to them but do not have an impact in the 2024 tax year, (1) Distributions from sale of illiquid assets (6.4%) and (2) Likely unrecoverable amount (20.8%).
     • Sale of illiquid assets: Any distributions received from the sale of illiquid assets will use the cost basis allocated to that category to determine loss/gain realized at that time.
     • Likely unrecoverable: Once court proceedings are finalized and it's determined no more distributions will be made, the cost basis allocated to this category can be claimed as a loss in full. However, if any additional distributions are made, this loss will be reduced by the FMV of additional distributions received.

Using these steps, you will be able to effectively allocate the cost basis of assets lost on Celsius to the 7 different categories (BTC "Returned", BTC "New", ETH "Returned", ETH "New", Stock, Sale of Illiquid Assets, Likely Unrecoverable) and calculate your realized gain or loss in 2024 and future years using the fair value of the distributions received.

A few examples might help.

Example #1 – Received Less BTC and Less ETH Than Initially Lost

Scenario: You lost 1 BTC, 5 ETH, and 50,000 USDC with cost basis of $10,000, $5,000, and $50,000 respectively ($65,000 total). Your total claim is $84,800.85 calculated using the petition prices linked in the "Understanding Your Claim Value" section with the 5% markup added. You receive 0.571285 BTC, 9.526521 ETH, and 632 shares of Ionic stock in 2024.

Follow the steps.

Step 1) Identify "Returned" BTC and ETH vs "New" BTC and ETH

Returned BTC = 0.571285, New BTC = 0, Returned ETH = 9.526521, New ETH = 0.

Step 2) For "Returned" BTC/ETH, Identify Cost Basis Returned

After manually looking at your tax lots of the crypto lost on Celsius, you determined the returned BTC has a cost basis of $7,000 and the returned ETH has a cost basis of $4,500.

Step 3) Identify Remaining Cost Basis to be Allocated

$65,000 total cost basis – $7,000 – $4,500 = $53,500 remaining

Step 4) Determine Starting Percentages for Allocation for Remaining Categories

• BTC "New" = (0/0.571285) x 28.95% = 0%
• ETH "New" = (0/9.526521) x 28.95% = 0%
• Stock = 14.9%
• Illiquid Asset Recovery = 6.4%
• Likely Unrecoverable = 20.8%

Step 5) Calculate the Final Percentages for Cost Basis Allocation

1. 0% + 0% + 14.9% + 6.4% + 20.8% = 42.1%
2. Calculate final percentages based on proportion
   1. BTC "New" = 0% / 42.1% = 0%
   2. ETH "New" = 0% / 42.1% = 0%
   3. Stock = 14.9% / 42.1% = 35.4%
   4. Illiquid Asset Recovery = 6.4% / 42.1% = 15.2%
   5. Likely Unrecoverable = 20.8% / 42.1% = 49.4%

Step 6) Allocate Remaining Cost Basis

Cost basis for BTC and ETH "Returned is as follows:

1. BTC "Returned" = $7,000
2. ETH "Returned" = $4,500

Cost basis allocation for remaining categories is as follows

1. BTC "New" = 0% x $53,500 = $0
2. ETH "New" = 0% x $53,500 = $0
3. Stock = 35.4% x $53,500 = $18,935
4. Illiquid Asset Recovery = 15.2% x $53,500 = $8,132
5. Likely Unrecoverable = 49.4% x $53,500 = $26,429

Step 7) Calculate Loss/Gain on Distribution

1. BTC "Returned" (0.571285) = No taxable event, crypto retains cost basis
2. BTC "New" (0) = No new BTC, no cost basis allocated
3. ETH "Returned" (9.526521) = No taxable event, crypto retains cost basis
4. ETH "New" (0) = No new BTC, no cost basis allocated
5. Stock (632) = FMV of $12,640 – $18,935 cost basis = $6,295 Capital Loss in 2024

Step 8) Cost Basis Reserved for Future Distributions

1. Illiquid Asset Recovery = Cost basis of $8,132 reserved to offset distributions received
2. Likely Unrecoverable = Cost basis of $26,429 to be claimed as loss once court proceedings finalize

Example #2 – Received More BTC and More ETH Than Initially Lost

Scenario: You lost 0.25 BTC, 2.5 ETH, and 50,000 USDC with cost basis of $2,500, $1,250, and $50,000 respectively ($53,750 total). Your total claim is $60,575.21 calculated using the petition prices linked in the "Understanding Your Claim Value" section with the 5% markup added. You receive 0.408082 BTC, 6.805015 ETH, and 451 shares of Ionic stock in 2024.

Follow the steps.

Step 1) Identify "Returned" BTC and ETH vs "New" BTC and ETH

Returned BTC = 0.25, New BTC = 0.158082, Returned ETH = 2.5, New ETH = 4.305015.

Step 2) For "Returned" BTC/ETH, Identify Cost Basis Returned

Since 100% of both the BTC and ETH were returned, the full cost basis of each is assumed for the "Returned" amounts. The "Returned" BTC keeps the $2,500 cost basis and the "Returned" ETH keeps the $1,250 cost basis.

Step 3) Identify Remaining Cost Basis to be Allocated

$53,750 total cost basis – $2,500 – $1,250 = $50,000 remaining

Step 4) Determine Starting Percentages for Allocation for Remaining Categories

• BTC "New" = (0.158082/0.408082) x 28.95% = 11.2%
• ETH "New" = (4.305015/6.805015) x 28.95% = 18.3%
• Stock = 14.9%
• Illiquid Asset Recovery = 6.4%
• Likely Unrecoverable = 20.8%

Step 5) Calculate the Final Percentages for Cost Basis Allocation

1. 11.2% + 18.3% + 14.9% + 6.4% + 20.8% = 71.6%
2. Calculate final percentages based on proportion
   1. BTC "New" = 11.2% / 71.6% = 15.64%
   2. ETH "New" = 18.3% / 71.6% = 25.56%
   3. Stock = 14.9% / 71.6% = 20.81%
   4. Illiquid Asset Recovery = 6.4% / 71.6% = 8.94%
   5. Likely Unrecoverable = 20.8% / 71.6% = 29.05%

Step 6) Allocate Remaining Cost Basis

Cost basis for BTC and ETH "Returned is as follows:

1. BTC "Returned" = $2,500
2. ETH "Returned" = $1,250

Cost basis allocation for remaining categories is as follows

1. BTC "New" = 15.64% x $50,000 = $7,820
2. ETH "New" = 25.56% x $50,000 = $12,780
3. Stock = 20.81% x $50,000 = $10,405
4. Illiquid Asset Recovery = 8.94% x $50,000 = $4,470
5. Likely Unrecoverable = 29.05% x $50,000 = $14,525

Step 7) Calculate Loss/Gain on Distribution

Reminder, the FMV is determined using the effective date prices on 1/16/2024 as shown in "Distribution Payout Structure" section above.

1. BTC "Returned" (0.25) = No taxable event, crypto retains cost basis
2. BTC "New" (0.158082) = FMV of $6,793 – $7,820 cost basis = $1,027 Capital Loss in 2024
3. ETH "Returned" (2.5) = No taxable event, crypto retains cost basis
4. ETH "New" (4.305015) = FMV of $11,094 – $12,780 cost basis = $1,686 Capital Loss in 2024
5. Stock (451) = FMV of $9,020 – $10,405 cost basis = $1,385 Capital Loss in 2024

Step 8) Cost Basis Reserved for Future Distributions

1. Illiquid Asset Recovery = Cost basis of $4,470 reserved to offset distributions received
2. Likely Unrecoverable = Cost basis of $14,525 to be claimed as loss once court proceedings finalize

Comments on Examples

In total, there are 16 different types of scenarios. While the two examples above show the calculation for receiving both more BTC and ETH and less BTC and ETH for low cost basis scenarios, you can of course have a mismatched scenario where you receive more BTC and less ETH or vice versa. However, if you just follow the instructions the calculation should stand up against any of the 16 possible scenarios outlined below.

https://preview.redd.it/o8fbk3qu06od1.png?width=1694&format=png&auto=webp&s=92907b16737b7a25a59bb93b472ff505171448a3

Closing Remarks

All in all, the Celsius calculation is far from simple. With so many moving parts, it feels like playing multi-dimensional chess. Each solution I came across online often worked well with 1 of the 16 scenarios. However, after trying to apply it to the rest it would fall apart at some point. The solution I have provided and outlined above is universal and can be used for any and all of the possible scenarios. It is comprehensive and granular to the point someone can perform the calc for themselves on their own. Unlike others, I don't want to gate-keep this calculation from the hundreds of thousands of people impacted by the bankruptcy.

If you are a CPA/tax professional and have critiques to my method outlined above, I encourage you to please comment below and share your thoughts. Knowledge sharing is very important in this space.

Feel free to ask any questions below and I'll try to answer them. Thanks for reading.

JustinCPA