The Tax Implications of Sam Bankman-Fried’s Conviction

On November 2, 2023, Sam Bankman-Fried was found guilty on all counts in his federal criminal trial in the Southern District of New York.

The most recent superseding indictment was filed on August 14, 2023, and included seven criminal counts such as wire fraud, securities fraud, commodities fraud, and conspiracy counts related to those activities.

This post is part of CoinDesk’s Tax Week, presented by TaxBit.

After a multi-week trial, SBF was found guilty on all counts. An appeal of this conviction is likely; plus, the sentencing phase of the prosecution is not scheduled to occur until early 2024. So the saga is not over yet.

But his conviction does provide, in its own way, some clarity for FTX customers waiting to figure out where they stand in the FTX bankruptcy proceeding and the tax treatment of any losses incurred.

The joint FTX bankruptcy

Since November 2022, the myriad of FTX affiliated companies, including Alameda Research, FTX,com (the offshore trading platform), and FTX.us (the U.S. trading platform), have been operating as debtors in bankruptcy.

Customers of both FTC.com and FTX.us have been in a holding pattern with little certainty as to whether they will receive any of their account holdings back either in fiat or crypto.

On July 31, 2023, the debtors filed a draft Plan of Reorganization under Chapter 11 of the bankruptcy code. The draft plan includes a number of upfront qualifiers alerting readers that it is likely to change over time as more information is uncovered, agreements are reached, and assets are discovered and moved back into the bankruptcy estate.

With that said, the draft plan does provide a framework for creditors holding claims against the debtors, including FTX.com and FTX.us customers. Importantly, this clearly indicates that customers will likely not be made whole and that any payout is almost certainly to be received in cash. There is a possibility for an alternate payout with respect to FTX.com customers, but that is only referenced in a footnote.

The draft plan segregates FTX.com and FTX.us customers into two distinct creditor pools, anticipating that funds to pay those pools will be based, at least initially, on fiat accounts or crypto wallets held in the names of each respective entity.

The IRS may use the impropriety of that activity to deny any losses…