The U.S. taxman is demanding $44 billion from Sam Bankman-Fried’s collapsed crypto empire, causing questions about what ramifications this could have for FTX creditors and other digital asset exchanges.
This week, the U.S. Bankruptcy Court handling what’s left of FTX and its affiliated entities posted a flurry of late-April filings from the Internal Revenue Service (IRS). All told, the IRS is seeking nearly $44 billion from SBF’s former crypto colossus, as detailed in 45 separate claims. Worryingly, the IRS claims may take precedence over those of retail digital asset traders.
The IRS claims differ depending on which unit of SBF’s Byzantine former holdings is being targeted. The single largest claim for $20.4 billion is directed at FTX’s former market-maker Alameda Research LLC, which is also the subject of a separate filing for $7.9 billion.
The filings cite extended lists of the various taxes the IRS believes it’s owed from this Alameda entity, the bulk of which is tagged as unpaid partnership taxes. There’s also Federal Insurance Contributions Act (FICA) payments that weren’t deducted from Alameda staffers’ pay packets. FICA payments generally help fund Social Security and Medicare benefits.
Then there’s withholding tax based on employees’ income tax obligations. Some online sleuths have suggested that the IRS may have reclassified Alameda’s purported ‘independent contractors’ as employees while also assuming that Alameda staff were U.S.-based. There’s also a theory that the IRS may be targeting executive compensation paid out as consulting fees rather than salary.
Another Alameda offshoot—Alameda Research Holdings LLC—is being asked to ante up a total of $9.5 billion, while still more Alameda units are collectively being dinged for over $200 million. All told, Alameda affiliates are responsible for roughly 85% of the total amount the IRS claims to be owed.
Other SBF-related entities targeted include multiple versions of West Realm Shires, the parent company of FTX’s U.S.-licensed exchange FTX.US, which collectively owe the IRS around $1.5 billion. The combination of FTX Trading and Blockfolio—the latter was absorbed into the former in 2020 following FTX’s $150 million acquisition—is on the hook for around $430 million.
Various versions of North Dimension, the fake electronics retailer set up by FTX attorney Daniel Friedberg to mask FTX/Alameda transfers from U.S. banking regulators, are facing a combined bill of over $612 million.
Ledger Holdings, the parent of the LedgerX derivatives trading platform, owes $250 million. In 2021, FTX paid $298 million to acquire LedgerX, which was just sold at a bankruptcy court auction for one-sixth that price by the poor sods tasked with trying to plug the gaps in SBF’s balance sheet.
Paper Bird, a company created for SBF to receive $2.3 billion in ‘loans’ from SBF-controlled companies, is facing a nearly $115 million claim.
Blood from a stone
It’s unclear on what information the IRS made its calculations, but there are a number of SBF’s former co-conspirators who are known to be cooperating with federal authorities. Given the privileged positions formerly held by some of these cooperating witnesses, the feds may have long since learned all they need to squeeze every penny out of SBF’s dormant criminal organization.
Still, there appears to be some overlap in the IRS view of the hierarchical soup that was SBF’s portfolio of companies, so the total sum the agency is seeking might actually be in the mid-$30 billion range or thereabouts. But even that might prove a gross overestimation of what FTX actually owes. Hell, if FTX/Alameda truly was the incompetent money-losing debacle detailed in the initial federal filings, the IRS might even owe FTX a refund.
Regardless, rank-and-file FTX creditors have reason to be alarmed by the IRS designating its claims under “administrative priority,” which would give them pre-eminence over unsecured creditors. That said, the ultimate decision is up to the judge overseeing the U.S. Bankruptcy Court of Delaware proceedings.
The FTX Debtors’ most recent financial statement to the bankruptcy court listed assets that are already billions short of its liabilities. To help close this gap, the Debtors are attempting to claw back $3.9 billion in payments that SBF-owned companies made to Digital Currency Group (DCG) companies in the 90-day period preceding FTX’s early-November bankruptcy filing.
But with billions already missing from this equation, it’s unclear why the IRS pitched its opening bid so high. Are they just staking out a favorable position from which to haggle down to something more reasonable? Or do they just want to ensure that the Department of Justice’s (DOJ) criminal case against SBF emphasizes the full extent of his shenanigans?
FTX/Alameda’s bankruptcy is unique among the past year’s insolvencies in that it’s the only one for which the Department of Justice designated one of its trial attorneys—Elisabeth M. Bruce—to serve as “counsel of record for the United States of America, on behalf of its agency the Internal Revenue Service (IRS).” Bruce, who holds a Masters in Forensic Accounting and previously served as a senior tax consultant at Deloitte, was handed the gig in January, replacing Ward M. Benson.
While the IRS may have filed its claims late last month, U.S. President Joe Biden tweeted an infographic this week urging Congress to cut “tax loopholes that help wealthy crypto investors.” The infographic appeared to claim that the government was being deprived of $18 billion in uncollected taxes via these vaguely defined criteria.
The suspicion that crypto whales are dodging their tax obligations isn’t new, as the IRS has been pursuing U.S.-based exchanges for details of their bigger customers’ trading activity since the middle of the last decade. Kraken, for example, is currently pushing back against an IRS summons seeking info on customers who traded more than $20,000 in digital assets in any single year spanning 2016 to 2020.
The IRS similarly went after sFOX, the self-described “crypto prime dealer for institutional investors,” and has made demands on banks that welcome digital asset firms. The IRS also expanded the scope of its oversight last year to include non-fungible tokens (NFTs) and stablecoins among the types of transactions on which tax may be owed.
Shortly before FTX’s implosion, the head of the IRS criminal investigation department predicted a surge in the bureau’s digital asset tax fraud cases. While the IRS later agreed to delay its $600 digital asset transaction threshold until the 2023 tax year, the federal government has adopted an increasingly antagonistic stance toward all things crypto.
For instance, the Securities and Exchange Commission (SEC) continues to bedevil U.S. digital asset firms, doling out eight-figure fines, nudging some already shaky exchanges into bankruptcy while warning others that their business models are illegal.
What’s in your (digital) wallet?
Kraken isn’t publicly traded, but Coinbase (NASDAQ: COIN), the leading U.S.-based exchange, is. Coinbase’s stock fell nearly 4% on Thursday, although, given Coinbase’s litany of problems, it’s unclear whether news of the IRS’s desire to squeeze FTX/Alameda dry—and rumors of possible ramifications for other exchanges—was the driving factor in that decline.
Like Kraken, Coinbase initially resisted IRS requests for customer data but ultimately complied with federal court orders to grow up already. Nowadays, Coinbase (begrudgingly) issues tax forms to customers whose digital asset transactions on the exchange generate gains of over $600 in a year.
Given the incestuous nature of the crypto ecosystem, one has to wonder if the IRS is curious about the types of transactions that may have occurred between FTX’s various entities and the more superficially upstanding exchanges like Coinbase.
Coinbase’s recent Q1 earnings report detailed non-bank credit and counterparty risks of nearly half-a-billion dollars, a good chunk of which was cash held at “3rd party venues,” including “cryptocurrency companies.” Coinbase claimed to have halted this practice of storing assets at other crypto firms by the end of the quarter, opening up the possibility that some of this cash was previously held with SBF-related entities.
Or not. As always with the major players in the digital asset space, those of us on the outside can only see through a glass, darkly. Instead of pleading persecution, crypto bros would do well to recognize that their fondness for opacity is a major contributor to the antagonistic government stance they so despise.
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.