Following the scandal of FTX’s collapse in 2022, many UK crypto investors are now starting to receive compensation. These payments raise important tax issues. Understanding how FTX payouts are taxed is especially important as regulation of the crypto space tightens.
What Are the Compensatory Payments from FTX?
FTX, a major cryptocurrency exchange, filed for bankruptcy in 2022. Subsequently, as a result of protracted litigation, former customers have now begun receiving partial compensation. These payouts are intended to compensate for lost crypto assets or fiat balances. However, it's almost certain HMRC will take an interest in these payments. We discuss below how FTX payouts are taxed so you can avoid potential issues with HMRC at a later date.
How HMRC taxes FTX payouts
Broadly speaking, HMRC's default position is to tax those compensatory payments from crypto-related transactions under the Capital Gains Tax ('CGT') rules.
However, the situation is slightly different to Mt Gox, as investors are receiving compensation in cash, as well as in the form of cryptocurrencies.
As a general rule. any crypto held in FTX as a personal investment for which you are receiving compensation falls within the scope of CGT. Therefore, you must calculate any capital gain by reference to the original acquisition cost. Furthermore, if the amount received is less than what you originally paid for your crypto, you can claim a capital loss.
Crucially, HMRC does not consider these payments from FTX as tax-free. Although, whilst you may consider it should be treated as a refund, HMRC don’t view it that way.
Because FTX filed for bankruptcy it's possible that you may have originally claimed loss relief at that time. Furthermore, this would have been based on the original acquisition cost of your crypto. As a result, any compensation you now receive from FTX will be subject to CGT in it's entirety with no base cost deductible.
Alternatively, HMRC may tax the compensation as income, However, this is likely to be in limited circumstances. For example, this tax treatment might apply if you run a crypto-related business or trade frequently and hold crypto as part of your stock in trade.
When is the compensation taxable?
The compensation is taxable in the tax year you receive it not by reference to the original FTX bankruptcy, Therefore, if you receive payments over several tax years, you’ll need to report each payment separately.
Additionally, if payments are made over several tax years, you'll need to allocate your base cost correctly between each FTX payout.
Summary
Therefore, understanding how FTX payouts are taxed will ensure you comply with HMRC ensuring you disclose correctly and pay any tax liability due. Although, as mentioned previously, the tax treatment will depend in what context you are receiving it. For example, as an investor or someone running a business in the crypto space.
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