Mt. Gox Victims: Tax Preparation for Payout

Mt. Gox Victims: Tax Preparation for Payout

The Japanese trading platform Mt. Gox (hereinafter: the exchange) was in its day the world’s leading platform for Bitcoin trading. In 2014, the exchange declared bankruptcy following a security breach, affecting tens of thousands of creditors around the world who held Bitcoin and fiat money at the exchange. It was later discovered that the exchange lost around 650,000 of its customers’ bitcoins, while only 200,000 bitcoins were left in the company’s cold wallet.

Right after the collapse of the exchange, a Japanese bankruptcy trustee was appointed by the court to fairly distribute these 200,000 Bitcoins. Over the years, the trustee has dealt with creditors’ claims, a large lawsuit by CoinLab (which was the American partner of the exchange and is appealing for a big slice of the pie), transferring the legal status of Mt. Gox from bankruptcy to civil rehabilitation (the large increase in the value of bitcoin in 2017, created a situation in which the value of assets exceeded the creditors’ claims and under Japanese bankruptcy law were to unfairly go to Mt. Gox owners and not creditors), and the liquidation of approximately 60,000 of the 200,000 Bitcoins held by the trustee to ensure all creditors are compensated fairly. Now, the news that all creditors have been waiting for has finally arrived – initial repayments of assets are finally expected to start.

The recovery plan approved by creditors’ vote gave them two options.

The first is an “early exit” option which pays out about 21% of their total assets (some Bitcoin assets are expected to be received as fiat money at a lower historical conversion rate than the current one). The second is of higher risk where, if the plan succeeds, the expected payout is about 23.5% of the original assets (but may also be less than that) paid out over several years. According to estimates, the lion’s share of creditors chose the first option. This payout option has three components, two of which are in fiat money and the third, depending on the creditor’s choice, is either fiat money or Bitcoin and Bitcoin Cash (held by the trustee after the Bitcoin Cash split in August 2017).

It should be noted that there are unofficial calculators which evaluate the total expected payout based on creditor’s original assets at Mt. Gox. For example, a creditor who held 100 bitcoins and 10,000 US dollars on the exchange at the time of its collapse, is expected to receive a total of 500,000 US dollars (at the conversion rates at the end of July 2023). Again, it should be noted that these are unofficial assessments and formal information on the actual payouts has not yet been received.

Payout of funds or assets to Israeli creditors requires preparation, first and foremost in terms of tax.

Receipt of fiat funds and digital assets under a negotiated arrangement with Israeli Tax Authority is expected to create a tax event, which will require reporting in accordance with the provisions of the Income Tax Ordinance and possibly payment of tax. Keep in mind that when such arrangements are made, the tax authorities tend to collect additional information from official sources related to the matter, and use that information to locate asset recipients who have not reported appropriately.

However, we believe there are also ways creditors can benefit in terms of taxation. First, there are legitimate legal positions that can be taken to try and reduce the tax burden. Second, since approximately 80% of the creditors’ assets have been lost, they should be written off in a manner that will be most beneficial.

Our office is communicating with the Israeli Tax Authority to examine a lateral and beneficial arrangement for Mt. Gox creditors. As we approach the first distribution date, currently scheduled for the end of October 2023, our office invites you to a free consultation meeting on the subject.

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