Say someone held some non-cash assets (shares, cryptocurrency, etc.) with a third-party business that went bankrupt. They become a creditor in the bankruptcy proceedings, lose access to whatever assets were being held on their behalf, and may at some point in the future recover some fraction of their original assets (usually but not necessarily as cash). My question is basically, what is the tax treatment for any assets recovered (assume US jurisdiction, though also the Australian case would be interesting)?

As in, do they count as legal winnings/compensation (not usually taxable), regular income, short/long-term capital gains, or something else entirely? And can the portion of assets lost/not recovered be written off against the amount recovered (if the recovery is taxable)? And if so, is that done based upon the value at the time of the bankruptcy or the "on paper" value at the time the recoverable assets are returned?

As a concrete example, say someone purchased 100 BTC on mtgox.com back when BTC was trading around $10 a coin. If they held all their coins until the exchange went bankrupt, they'd be looking at recovering somewhere around 20 BTC, probably sometime next year. When that happens, the value of the recovered BTC could exceed $1 million. Far more than the initial investment, but also far less than the present value of the 80 BTC lost in the bankruptcy. Is the tax payable:

  • Nothing, because the assets are coming from a court proceeding?
  • Nothing until the BTC are converted to fiat currency, then the converted amount is treated as capital gains?
  • Nothing, because there are 4 times as many "lost" BTC that can be accounted for as a loss?
  • The full value of the 20 BTC recovered, as income?
  • The full value of the 20 BTC recovered, as capital gains?
  • Something else?

And is the outcome different if the recovery is made in cash/fiat currency as opposed to BTC/cryptocurrency?

  • 3
    To add another fly to the ointment for this particular example you’re also recovering from a court proceeding taking place in Japan. So normal US or Australian bankruptcy recovery rules probably won’t apply anyway.
    – quid
    Apr 11, 2021 at 1:33
  • I have owned 2 NY stock exchange stocks that went bankrupt. I do no know the legal term but basically the lawyers get any money that results from bankruptcy. Jan 6, 2022 at 19:11

1 Answer 1


FOR US -- or more exactly, for persons considered tax residents of US, which is not always the same thing as actual residence -- "legal winnings ... not usually taxable" is quite wrong. All lawsuit awards or settlements are taxable except compensatory (NOT punitive) damages for physical injury or sickness. Pub 525 says

The character of the income as ordinary income or capital gain depends on the nature of the underlying claim.

Although it only gives examples of ordinary income, I'm pretty sure this case qualifies as capital gain -- the amount you receive (net of any costs like if you have to notarize it or something) minus the purchase cost (or basis after adjustments, but I don't think any apply to bitcoin).

Though I'm not sure if you need to treat this as two lots -- the 'recoverable' part (with about 20% of basis) 'disposed' for a gain, and the 'stolen' part (with the rest of basis) rendered worthless for a loss, which the tax return adds up to same result as proceeds minus total basis.

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