FTX was one of the world’s largest crypto exchanges and was highly regarded by many in the industry. The collapse of FTX came as a shock to many especially as FTX had been actively working towards higher regulatory oversight.
The collapse has left around 30,000 Australians on the list of more than 1 million unsecured creditors worldwide. They are currently locked out of their crypto accounts and are unable to access their funds on FTX. They face the prospect of a partial or total loss of their investment.
Investors will be wanting to write off their FTX losses in their tax return as soon as possible but it won’t be that easy. Investors need to collate whatever documentation they can to confirm the cost base of their investment.
The capital loss incurred can’t be claimed until the Administrator appointed to sort out the mess confirms what has happened and the size of the loss for each investor. This process could take years to sort out. In the meantime,
Even then, a capital loss can only be used to offset capital gains, otherwise they are carried forward indefinitely. Capital losses cannot be used to offset other income such as salary or investment income.
If you were lucky enough to not have your Crypto stored in FTX, what are your storage options going forward?
1. DIY – With trust in centralised exchanges dropping, many crypto investors will be looking to self-custodial options such as a hardware wallet solution which allows an investor to have complete control over their assets. This solution is effective at removing the counterparty risk of the exchange, it does lead to a new set of risks that investors need to be aware of. Crypto investors who self-custody will need to educate themselves on how to safely and securely store their crypto assets. That includes setting up secure passphrases and storing backups.
2. Exchange – If you are not comfortable with self-custody of your crypto assets, you can continue to use a third-party such as an exchange but you need to double check that your exchange holds client assets 1:1, undertakes regular external audits and don’t lend client assets to other entities. Many exchanges are already mobilising to bring this added assurance to their users.
3. Managed Investments – Another option is to consider investing in Crypto via managed investment products that provide exposure through the regulated AFSL environment.
If you would like to discuss any of these issues in more detail please give the team at DFK Everalls and Everalls Wealth Management a call.
