How to deduct a loss from an investment that went bankrupt?

Question

We had money in a BlockFi account, which went bankrupt at the end of 2022. How can we deduct that loss on our 2022 tax return?

Answer 1

You may want to consider consulting a tax attorney for this. This is, for the most part, new territory with a lot of gray area in the tax code.

You can claim worthless securities as a loss on your Schedule D/Form 8949, but a few issues might come into play here.

1. BlockFi filing for bankruptcy doesn't necessarily mean your holdings are worthless. Until there's a final determination of recovery, your holdings may just be locked up and illiquid, but not worthless.
2. Your holdings are presumably not BlockFi stock or debt, but cryptoassets and USD deposits, which further blurs the line of when your holdings are considered worthless - BlockFi stock itself becoming worthless doesn't necessarily mean that the deposits and holdings are also worthless.
3. Writing off worthless securities is irrevocable - you can't get any money for securities you claim as worthless in the future. "To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it." (IRS Pub. 550, "Worthless Securities")
4. Neither the IRS nor the SEC sees cryptoassets as securities, and the worthless securities provision could be interpreted as only applying to securities (this is not tax or legal advice - CPAs and tax attorneys will take various stances).