Take These 3 Crucial Steps After Losing Money in Crypto Bankruptcies

In the rapidly evolving landscape of cryptocurrencies and digital assets, advancements frequently surpass regulatory frameworks. Although this situation has created thrilling prospects and substantial gains, it has simultaneously introduced various risks, such as the troubling incidence of bankruptcy among crypto platforms.

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Many platforms and exchanges that failed previously have tarnished the cryptocurrency marketplace, causing investors significant hesitation when considering investing in this unstable sector. Consequently, investors find themselves vexed over strategies to recover their losses, release locked funds, or sidestep potential legal issues.

If you've lost money due to the failure of an exchange, lender, or cryptocurrency investment platform, know that you're not alone, and several actions can be taken to safeguard yourself and potentially reclaim your funds. Below are three crucial steps: if you've been impacted, here’s what to do .

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Step 1: Submit a Claim (Despite Uncertainty About Eligibility)

If a cryptocurrency firm declares bankruptcy within the U.S., a legal procedure starts to figure out how leftover assets or client funds get allocated. Yet, should you possess a custodial account, receiving compensation might be uncertain since you would rank behind creditors and lawyers. Therefore, numerous specialists recommend diversifying your cryptocurrencies among multiple wallets , as this minimizes your risk while still allowing you to move currency balances whenever necessary.

Lenders such as creditors and users might have the right to reclaim part of their money from cryptocurrency loan providers during insolvency proceedings. The crucial action for safeguarding these rights involves submitting a claim.

Here are several important points for this stage:

Visit the official website or the one provided by the court-appointed trustee for guidance. For instance, websites such as the Celsius Network, Voyager Digital, and FTX have created specific claims portals.
Submit your application well ahead of time to comply with any filing dates or other deadlines, since certain ones can be remarkably brief periods when dealing with bankruptcy courts.
If you're unsure about the precise quantity or necessary paperwork, go ahead and file a claim. It's preferable to be part of the process and adjust details subsequently rather than being excluded altogether.

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Step 2: Record All Information Possible

Several years back, amid the well-remembered implosion of cryptocurrency markets in 2022, the FTX exchange, together with over 130 related companies, declared Chapter 11 bankruptcy. This led to a ripple effect across the industry; consequently, another major player in the sector, BlockFi, announced its own filing for bankruptcy, stating: "This comes after the stunning developments around FTX and connected organizations, which forced us to make the tough yet essential choice to halt nearly all operations on our platform."

That year, a similar chain reaction took place when another entity fell into trouble following FTX’s collapse. The Securities and Exchange Commission (SEC) accused Gemini and Genesis of "offering and selling unregistered securities to individual investors via the Gemini Earn cryptocurrency lending program."

Investing in cryptocurrency is definitely not for those with weak nerves. As it continues to remain unpredictable in 2025, keeping records of all your investments along with any related transfers and exchanges becomes essential. Having comprehensive details will enhance your likelihood of reclaiming your assets. Such documentation might also prove necessary for tax purposes or potential legal proceedings.

Preserve images of your account screens, detailed records of transactions, confirmation emails, and wallet addresses.
Backup everything that demonstrates the amount of cryptocurrency or fiat money you possessed on the platform and at what time.
Should the company or trustee provide you with an account summary or claim statement, cross-check this information against your own records and promptly report any inconsistencies.

Step 3: Consult with a Legal or Financial Expert

Regulating cryptocurrency can be quite complicated. Although the Commodity Futures Trading Commission (CFTC) oversees cryptocurrencies, this typically applies only when they are involved in derivative markets or when there is fraud or manipulation concerning a digital currency traded across state lines.

Nevertheless, the CFTC has restricted regulatory power over cash markets; it retains broad anti-fraud and manipulation oversight, yet its applicability to cryptocurrency bankruptcy remains unclear. Cryptocurrency bankruptcies often become intricate rapidly. Consulting legal and financial specialists could aid in clarifying your alternatives. avoid scams And possibly pursue additional steps.

Seek out lawyers who focus on cryptocurrency law, bankruptcy cases, or class-action lawsuits.
In case your losses were substantial, think about either joining or establishing a creditor committee or filing a class-action lawsuit.
Generally, it's advisable to be cautious of "recovery scam" services as fraudsters typically target individuals who have experienced financial losses.

Who Owns the Crypto?

Typically, assets such as different cryptocurrencies held by these platforms belong to the customers rather than the platform itself in case of bankruptcy. This means customers would have a higher likelihood of reclaiming their assets rapidly.

In simple terms, if the assets belong to the platforms, you effectively become an unsecured creditor. This places you lower in line compared to secured and other priority creditors during bankruptcy proceedings. Usually, once secured and other priority creditors have received their payments, there aren’t enough leftover assets to fully compensate all unsecured creditors. These unsecured creditors usually share equal status among themselves—so whatever remains gets split fairly evenly across everyone involved, resulting in most likely receiving only a fraction of what they’re owed.

Remember that the type of bankruptcy chosen by an individual platform can determine how long it takes before you start receiving repayments.

How Bankruptcies Impact Your Tax Liability

An additional consideration is that bankruptcy processes often drag on for quite some time. During these proceedings, you cannot claim a loss on your taxes. Meanwhile, as you wait, TurboTax suggests that the most effective step you can take is to collect all relevant documentation pertaining to your cryptocurrency accounts.

When the platform's bankruptcy concludes and the assets are considered valueless, "You may use the loss from your cryptocurrency based on its purchase price to counterbalance your profits," stated TurboTax. "Additionally, this loss can offset other earnings such as salary up to $3,000; any excess beyond $3,000 can be applied toward future years."

In total, the opportunities to recover losses in these cases are scarce. Aaron Kaplan, who founded and serves as co-CEO of Prometheum It should be noted that recoveries from the FTX and similar crises are expected to remain minimal due to the substantial financial burdens of bankruptcy, which will significantly decrease the amounts ultimately payable to customers who were creditors of these insolvent entities.

Kaplan further noted that investors with additional capital gains ought to seek advice from their tax consultants regarding offsetting their losses from these troubled entities against those capital gains.

Multiple class-action lawsuits have been initiated against numerous entities involved as either direct participants or accomplices in the operations of these defunct institutions," he stated. "Such class actions may likely provide a modest recovery for those who were financially harmed.

Yaël Bizouati-Kennedy participated in the research and writing of this piece.

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