Celsius is a cryptocurrency lending company. The primary service offered was a staking service. Users could deposit cryptocurrency into a Celsius wallet and earn a yield on the deposit (similar to a bank offering a term deposit). Celsius also offered leveraged finance, whereby users can use their cryptocurrency as security to draw down fiat or crypto loans from the platform.
Celsius is considered a centralised finance (CeFi) platform, as a single entity controls it. This is contrasted with decentralised finance (DeFi), which is not controlled by entities but rather by automated applications developed on top of blockchain platforms. Each has its advantages and disadvantages.
Similar companies in the CeFi/DeFi space include BlockFi, Compound, Ledn, among others.
At its peak in May 2022, Celsius had lent out $8bn USD in loans, had $12bn USD in assets under management (or deposits from users), and offered yields as high as 17% per annum on deposits.
In June 2022, due to adverse market conditions, the company placed a pause on wall transfers and withdrawals on the platform. In July 2022, the company filed for bankruptcy in the US, owing $4.7bn to its users.
This article will explain the tax treatment for interactions with Celsius and provide recommendations for the treatment of holdings on the platform.
Lost Tokens – Tax Treatment
Due to the bankruptcy, many platform users have lost access to their tokens. Because the bankruptcy process is lengthy and time-consuming, tokens staked with the platform may or may not be returned to users.
There are options to consider if you have tokens staked on Celsius. It is currently unclear and too early which option is recommended, and we will provide an edit or update closer to the end of the financial year. For now, we have discussed several options to consider.
- Write off tokens immediately and claim a deduction for their original cost. Staked tokens are forfeited for no value and removed from your portfolio.
- The loss is calculated as the total cost price of the tokens at the time of staking. This option presents the easiest to administer and calculate. In addition, you gain the benefit of claiming the loss immediately.
- If you receive some of your investment back, this would be a taxable event. The market value of the tokens received would be taxable income at the time of receipt.
- The above approach is similar to IRD’s guidelines on stolen cryptocurrency and the recovery (if applicable) outlined here.
- You can choose to wait for a potential payout from Celsius (for tax purposes). The staked tokens are retained as part of the closing stock in the portfolio. This option allows the tokens to be retained on the portfolio but is dependent on the payout from the bankruptcy proceeds, which is not guaranteed.
Summary and Recommendations
The saga of Celsius provides a good example and a warning to those seeking to stake their cryptocurrency on centralised/decentralised platforms. We recommend the following to those affected by Celsius.
- Decide on the tax treatment and await further recommendations from us. Each has its advantages and disadvantages, but for ease of processing and tax planning, it may be beneficial to write off holdings immediately. This will provide you with an immediate deductible loss based on the token’s value at the time of staking.
- Consider payout yields, and perform due diligence on the services offered and provider before investing. All investments have inherent risk, and cryptocurrency is among the most high-risk/high-reward type. The saying goes, “if it’s too good to be true, it probably is”.
- Spread investments amongst several providers/tokens to mitigate the risk of one falling over.
Contact Tim Doyle for a call or meeting to discuss any cryptocurrency tax or accounting questions. Our office is in Cambridge, Waikato, or we can arrange a video conference call.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.