The collapse of crypto exchange FTX sent shockwaves through the digital asset industry. Now, the reverberations are being felt in bankruptcy court as the US Internal Revenue Service (IRS) tries to extract billions in supposed unpaid taxes.
In a recent filing , FTX fired back against the taxman’s claims, arguing the $24 billion bill would leave little for the exchange’s creditors and victims. FTX’s lawyers said: “There is simply no basis to support the IRS’s meritless claims.”
The exchange’s legal team also said the amount was “orders of magnitude greater than any income the Debtors ever earned.”
In unusually fiery prose, the bankrupt exchange maintained the tax claims are inflated beyond reason. It stated in its filing: “This Alice in Wonderland argument has no support in the law.”
At the core of the clash is whether the court should “estimate” the IRS’s claims now or allow the agency to finish auditing FTX’s taxes first – a process that could drag on for months. FTX wants to settle on an amount sooner, knowing that any taxes extracted by the IRS will diminish the pool of assets available to reimburse bilked customers and investors.
FTX argued: “The IRS’s reliance on its own processes only serves to delay distributions to those truly injured.”
The exchange warned that IRS inaction coupled with wildly optimistic tax claims would handcuff FTX’s administrators. Funds reserved for the American government cannot be paid out to other creditors until the actual tax liability is fixed.
The IRS started at $44 billion before revising to $24 billion. FTX, meanwhile, believes the true figure, if any, is far lower. The lawyers pointed out that FTX only operated for three years and overall lost billions of dollars.
They said: “It just makes no sense that a company that lost many billions of dollars would have a substantial tax liability, much less one for $24 billion.”
The current state of affairs represents a marked turn for the crypto industry in its dealings with US authorities. Previously operating in a legal gray zone, digital asset startups are now facing increased scrutiny from agencies like the IRS and Department of Justice.
US officials are cracking down on any perceived partiality, and want to be seen doing so. This is especially true after Sam Bankman-Fried, now convicted on all charges for his role at FTX, managed to woo so many in U.S politics and government.
The exchange crumbled in November 2022 after a liquidity crunch spiralled out of control. Customers rushed to withdraw funds as doubts emerged about the financial health and management of FTX and its affiliated trading firm, Alameda Research.
In less than a week, FTX went from a $32 billion crypto giant to bankruptcy. Investigations soon uncovered that FTX founder Sam Bankman-Fried allegedly misused customer deposits to prop up Alameda’s risky bets.