Many cryptocurrency lenders have declared bankruptcy. These loss events are indicators of the significant losses the cryptocurrency market has experienced this year.

For investors who have suffered, an important consideration is how to capitalize on these losses. Accordingly, this article will analyze the recent Celsius Network ("Celsius") bankruptcy and the tax strategy of writing off bad debt.

The Celsius Bankruptcy

On July 13, 2022, Celsius filed for Chapter 11 bankruptcy protection.1 From a lender once purporting to have $25 billion in assets under management, the company only held $167 million in "cash on hand" at the time of their bankruptcy filing.2

Celsius was intended to operate as a traditional bank with the promise of significant returns – nearly 20% annual percentage yield. As an investor, a user could deposit cryptocurrency into Celsius.3 The lender would then take these deposits and loan them out to borrowers.4 The user would then receive a payment from Celsius on a weekly basis, based on the revenue Celsius gained from the loans that were ultimately funded by investors' deposits.5 As a borrower, a user could offer cryptocurrency as collateral and take out cash or stablecoin loans in exchange.6 Although simple in principle, Celsius could not sustain this model.

To offer yields as high as 20%, the lender has been accused of operating a Ponzi scheme. Allegedly, the lender paid the yields owing to early depositors with funds invested by new users while failing to maintain holdings in cryptocurrency equal to it's liabilities. As a result, when users sought to withdraw their deposits at a time when cryptocurrency prices were high, Celsius was forced to buy more cryptocurrency in the open market at high prices. This resulted in heavy losses. To attract more users and cover its losses, Celsius increased interest rates to repay earlier depositors and creditors.7

However, with the recent drop in the market, Celsius' liabilities significantly increased above it's assets. According to it's financial statements and bankruptcy filings, Celsius currently has $5.5 billion in liabilities ($4.7 billion is owed to users) and only $4.3 billion in assets.8

Celsius also made unsuccessful investments.9 Celsius tied up funds in long-term and illiquid cryptocurrency contracts and pledged assets in support of amounts borrowed or sold to generate cash for mining equipment. Holding such illiquid debt, especially with significant market fluctuations, has made it difficult for the lender to retrieve funds to satisfy its liabilities.

Ultimately, Celsius froze its customers' accounts in June 2022, attributing its decision to "extreme market conditions".10 As the lender has filed for Chapter 11 bankruptcy, the funds remain inaccessible to users.

According to Celsius' "Terms of Use" (the "Terms"), in the event of bankruptcy:

  • Any cryptocurrency assets used to earn cryptocurrency or as collateral for loans may not be recoverable;
  • Users do not have any legal remedies or rights in connection with Celsius' obligations;11 and
  • Users may be treated as unsecured creditors.12

With such restrictive terms and bankruptcy proceedings underway, it may be very difficult for users to recover their investments – an immediate and complete recovery will be unlikely.

Bad debt rules in the Income Tax Act (Canada)

Paragraph 50(1)(a) of the Income Tax Act (the "ITA")13 is the operative provision regarding "bad debts". Where paragraph 50(1)(a) of the ITA applies, the taxpayer is deemed to have disposed of the debt at the end of the tax year for nil proceeds, and to have reacquired the debt after the end of the year at a cost of nil.14 This deemed disposition could result in a capital loss equal to the adjusted cost base of the debt to the taxpayer (subject to subparagraph 40(2)(g)(ii), described below).

In order for paragraph 50(1)(a) of the ITA to apply:

  • The debt (excluding debts in respect of the disposition of personal-use property) must be owing to the taxpayer at the end of the tax year;
  • The taxpayer must establish that the debt has become a bad debt in the tax year; and
  • The taxpayer must file an election in the taxpayer's income tax return for the tax year.15

For example, for paragraph 50(1)(a) to apply to a debt in 2022, the taxpayer must show that the debt is owing to the taxpayer at December 31, 2022 and that the debt has become "bad" in 2022, and the taxpayer must elect for paragraph 50(1)(a) to apply in their 2022 income tax return.16

According to the Canada Revenue Agency (the "CRA"), the time at which a debt becomes a "bad debt" is a question of fact.17 Generally, the CRA is of the position that a debt becomes a "bad debt" at the end of the year if the taxpayer has exhausted all legal means of collecting it, or the debtor has become insolvent and has no means of repaying it.18 In Flexi-Coil Ltd. v R,19 the Federal Court of Appeal held that the question of when a debt has become uncollectible is a matter of the taxpayer's own judgment as a prudent businessperson.20 The court must be satisfied that the taxpayer made the determination that the debt is uncollectible and that the taxpayer acted in a businesslike manner when making this determination.21

The CRA has also relied on Rich v R ("Rich")22 in developing its position on when a debt becomes "bad".23 In Rich, the Honourable Justice Rothstein (as he then was), described factors that should be used when determining whether a debt has become "bad". These factors include:

  • The history and age of the debt;
  • The financial position of the debtor;
  • Changes in total sales as compared to previous years;
  • The debtor's cash, accounts receivable, and assets as compared with previous years;
  • The debtor's accounts payable and current liabilities as compared with previous years;
  • The general business conditions in the debtor's country, community, and line of business; and
  • The taxpayer's past experience with writing off bad debts.24

If a debt is disposed of for less than its adjusted cost base, subparagraph 40(2)(g)(ii) of the ITA states that the loss is deemed to be nil unless the debt was acquired by the taxpayer for the purpose of gaining or producing income from a business or property or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm's length.25

In the event the bad debt is subsequently collected, even in part, paragraph 12(1)(i) of the ITA states the amount collected is included in the taxpayer's income in the year it is received.26

To rely on paragraph 50(1)(a) of the ITA, in addition to making the necessary election, a Celsius user would need to establish that:

  • There is a "debt" owing to them at the end of the tax year; and
  • The debt has become a "bad debt" in the tax year.

There is uncertainty as to whether the first requirement above could be met, given that the CRA has generally taken the position that cryptocurrency is not considered to be "money" or "currency" for the purposes of the ITA, but rather a "commodity".27

In addition, in order to avoid subparagraph 40(2)(g)(ii) of the ITA deeming any loss to be nil, a Celsius user would need to establish that the debt was acquired for the purpose of gaining or producing income from a business or property or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm's length.

Ultimately, the path forward for Celsius investors is unclear, but the months or years ahead should begin to provide more certainty. Taxpayers who are invested in Celsius should consider consulting a tax professional to receive advice.


The bankruptcy of cryptocurrency lenders is a loss event currently prevalent in the cryptocurrency market. Although the authors would love to assert that such events will no longer occur in the nascent-cryptocurrency-industry, such an assertion would be inaccurate. With that being said, investors should consider available strategies if they are subject to such collapses and as a proactive measure in case their cryptocurrency holdings are similarly affected.

In these trying times, it is important for investors to be patient and prepared. If you need assistance with your cryptocurrency-tax concerns, please contact a member of the Miller Thomson LLP Corporate Tax team.


1 Wayne Duggan, "What is Celsius? Why is it Crashing the Crypto Market?" (July 18, 2022), online: Forbes Advisor

2 MacKenzie Sigalos, "From $25 billion to $167 million: How a major crypto lender collapsed and dragged many investors down with it" (July 17, 2022), online: CNBC

3 Steven Buchko, "What is Celsius Network?" (June 16, 2022), online: CoinCentral

4 Ibid.

5 Ibid.

6 Ibid.

7 Arjun Kharpal, "Embattled crypto lender Celsius is a 'fraud' and 'Ponzi scheme,' lawsuit alleges" (July 8, 2022), online: CNBC

8 Sigalos, supra note 2.

9 Ibid.

10 Hannah Lang, "State securities regulators investigating Celsius accounts freeze" (June 16, 2022), online: Thomson Reuters

11 Celsius Network, "Terms of Use" (April 14, 2022), online: Celsius Network at 13. Consent to Celsius' Use of Digital Assets [Terms of Use].

12 Ibid at "4. Services, B. Custody".

13 RSC, 1985 c 1 (5th Supp) [ITA].

14 Canada Revenue Agency, Income Tax Folio S4-F8-C1, "Business Investment Losses" (February 18, 2017) at para 1.20 [IT S4-F8-C1].

15 Ibid at para 1.21.

16 Ibid.

17 Ibid at para 1.34.

18 Ibid.

19 [1966] 3 CTC 57, 96 DTC 6350 ("Flexi-Coil").

20 Ibid at para 5.

21 Ibid.

22 2003 FCA 38 ("Rich").

23 IT S4-F8-C1, supra note 14 at para 1.35.

24 Rich, supra note ­22 at para 13.

25 ITA, supra note 13, subparagraph 40(2)(g)(ii).

26 ITA, supra note 13, paragraph 12(1)(i); Rich, supra note 22 at para 15.

27 See for e.g., Canada Revenue Agency, Technical Interpretation 2013-0514701I7, "Bitcoins" (December 23, 2013).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.