2023-0996541I7 Capital gain or loss in Mt. Gox insolvency

Principal Issues: For a taxpayer who held crypto-assets on account of capital on the Mt. Gox platform (the “Taxpayer”) and elected for Early Lump-Sum Repayment in the Mt. Gox civil rehabilitation proceedings in respect of his or her cryptocurrency claims against the estate of Mt. Gox: 1. Did the Taxpayer realize a capital gain or loss on his or her investment as a result of the collapse of the Mt. Gox platform? If yes, when was the capital gain or capital loss realized? 2. Are payments received or receivable by the Taxpayer from the estate of Mt. Gox in relation to Bitcoin Cash taxable under section 9 of the Act?

Position: 1. General comments. Taxpayers should realize capital gains or losses, as applicable, upon the disposition of their cryptocurrency claims. A disposition of the Taxpayer’s claim will likely have taken place at the time of receipt of the Early Lump-Sum Repayment. 2. Payments received from the Mt. Gox estate in relation to Bitcoin Cash should be included in the proceeds of disposition of creditors’ claims. The Taxpayer would not be required to include the “forked” Bitcoin Cash in income at the time of the “fork”.

Reasons: 1. Definition of "disposition" in subsection 248(1) 2. The Taxpayer had a right only in respect of bitcoin and not Bitcoin Cash on the Mt. Gox platform.

Author: Dumas, Charles
Section: 39; 248(1) “disposition”, “property”; Civil Rehabilitation Act (Japan); Bankruptcy Act (Japan)

Élisabeth Daigneault                                            Income Tax Rulings Directorate
Senior Programs Officer                                       2023-099654
XXXXXXXXXX
Compliance Programs Branch

October 30th, 2024

Dear Ms. Daigneault:

Re: Capital gain or loss on insolvency of the Mt. Gox platform

This is in reply to the request sent to us by Élisabeth Daigneault (Senior Programs Officer, XXXXXXXXXX) on October 30, 2023, with subsequent revisions, regarding the realization of a capital gain or loss under the Income Tax Act (hereinafter the “Act”) by an individual taxpayer (the “Taxpayer”) resident in Canada who held bitcoin (or “BTC”) on the Mt. Gox platform.

Unless otherwise noted, all statutory references herein are references to the Act.

Facts

It is our understanding, based on the limited facts that you have provided, that the Taxpayer:

- was at all relevant times an individual resident in Canada;

- held bitcoin through an account on the Mt. Gox platform at the time of the events that led to the insolvency of the platform operator (MtGox Co., Ltd., or “M Ltd.”) in 2014;

- held the bitcoin on account of capital; and

- has, to date, not been able to retrieve the bitcoin held through the platform nor has the Taxpayer assigned his or her rights with respect to such coins to a third party.

Based on publicly available information relating to the M Ltd. insolvency and documentation that you have provided, it is our further understanding that the relevant facts can be briefly summarized as follows:

1. Mt. Gox was a centralized bitcoin exchange operated until 2014 by M Ltd., a corporation incorporated in Japan and based in Tokyo, Japan.

2. In February 2014, Mt. Gox halted bitcoin withdrawals, cancelled all bitcoin trading, and froze accounts after claiming to have found suspicious activity in its digital wallets. It was ultimately estimated that Mt. Gox had permanently lost approximately 650,000 of the bitcoins that had been held on its platform.

3. On June 10, 2015, the Tokyo District Court ruled that, under Japanese civil law, a user of the Mt. Gox platform had no ownership rights over the bitcoin held through the platform. As such, the holder was considered an unsecured creditor of M Ltd. (the “Property Judgment”). (endnote 1)

4. On August 1, 2017, a “hard fork” in the bitcoin blockchain resulted in the “issuance” of Bitcoin Cash to holders of bitcoin on a 1:1 basis. The units of Bitcoin Cash that were “issued” in respect of bitcoin held by the M Ltd. estate were also included in the estate.

5. On November 16, 2021, following a lengthy insolvency process mostly conducted in Japan, the Tokyo District Court finalized an arrangement proposed by the trustee of the M Ltd. estate and voted on by the M Ltd. creditors (endnote 2) under the Japan Civil Rehabilitation Act (the “Rehabilitation Plan”).

6. The Rehabilitation Plan provided for various payments to former Mt. Gox platform users who held assets on the platform at the time of its insolvency. In general terms, former users of the platform could elect to receive either what is referred to as an “Early Lump-Sum Repayment” or a “Final Repayment”. Former users that held claims (endnote 3) to bitcoin on the platform at the time of insolvency could also elect to receive payment for their claims entirely in fiat currency, or as a combination of bitcoin, Bitcoin Cash and fiat currency.

7. Former users who elected to receive the Early Lump-Sum Repayment could expect to receive payments totalling approximately 21% of their approved claims.

8. Former users who elected to receive the Final Repayment instead would receive payments based on the value of the remaining assets of the estate at an undetermined date in the future, after remaining disputed claims are resolved. The total payments in respect of each approved claim are not expected to exceed 23.6% of the claim.

9. In the case of former users that held claims to bitcoin at the time of M Ltd.’s insolvency and that have elected to receive the Early-Lump Sum Repayment, the Rehabilitation Plan grants discretion to the trustee to determine the proportion of payments to such creditors that will be funded by fiat currency or crypto-assets. The ratio (“Allotment Rate”) between the two asset classes is to be determined at the rehabilitation trustee’s discretion depending on the assets available and the approved claims against the estate. Given the volatility in the price of bitcoin since the approval of the Rehabilitation Plan in 2021, a change in the Allotment Rate can greatly affect the total value of each repayment. It is important to note that the Allotment Rate is also relevant for creditors electing to receive payment exclusively in fiat currency given that such payments are made based on the value of the crypto-assets attributable to the creditor at the time of payment.

10. Former users were given access to an online portal to submit their elections and provide payment details to the rehabilitation trustee. In order to submit this information, they were required to read and accept Terms of Consent. Among others, one of the terms stipulated that the M Ltd. estate and the rehabilitation trustee cannot be held liable by creditors or any other person for any damages resulting from the rehabilitation trustee’s determination of the Allotment Rate.

11. The Early Lump-Sum Repayments are to be paid on or before October 31, 2025, but the rehabilitation trustee may extend the deadline with the permission of the Tokyo District Court.

12. The Taxpayer elected to receive the Early Lump-Sum Repayment.

Issues

1. Did the Taxpayer realize a capital gain or loss as a result of the insolvency of the Mt. Gox platform? If yes, when was the capital gain or capital loss realized?

2. Are payments received or receivable by the Taxpayer from the estate of Mt. Gox in relation to Bitcoin Cash taxable under section 9 of the Act?

Our Comments

Our comments with respect to the tax consequences for the Taxpayer resulting from the transactions described above are dependent on the completeness and accuracy of the information that you have provided.

As is often the case when determining the tax consequences resulting from intermediated crypto-asset transactions, the determination of whether or when a taxable event has taken place in the context of the M Ltd. insolvency is dependent on the nature of the property held by the Taxpayer and his or her relationship with the intermediary. Although the exact legal relationship that existed between M Ltd. and those who held crypto-assets through its platform is still somewhat unclear, based on the above-mentioned Property Judgment, we are of the view that former users may have difficulty establishing ownership of the bitcoin held through the platform and any “forked” crypto-assets under the prevailing Japanese law. Instead, taxpayers would likely be found to have had a contractual claim for bitcoin against M Ltd. and subsequently, its estate.

CRA response to question 1

A taxpayer’s capital gain or loss is defined in paragraphs 39(1)(a) and (b) of the Act to be his or her gain or loss for the year from the disposition of any property other than certain specific property identified in subparagraphs 39(1)(a)(i) to (v) and (b)(i) and (ii).

What constitutes a “disposition” is defined for the purposes of the Act in subsection 248(1). The definition, however, is not exhaustive. As such, when determining if or when a disposition of property has taken place, it is necessary to determine if or when ownership was transferred or extinguished under the applicable private law, and whether specific inclusions and exclusions listed in the definition in subsection 248(1) apply.

In the case at hand, in order for the Taxpayer to recognize a capital gain or loss as a result of the M Ltd. insolvency, it must be established that the Taxpayer has disposed of property or was deemed to have disposed of property. Based on the available information, it is our understanding that former users of the Mt. Gox platform did not hold proprietary rights over, or beneficial ownership in, the bitcoin held through the platform, including those that M. Ltd. was found to have lost. Instead, they owned contractual claims against M Ltd. As such, it does not appear that M Ltd.’s loss of bitcoin would, in itself, trigger a disposition of the claims owned by former users of its platform, although the loss may have negatively affected the value of such claims.

Based on our understanding of the facts submitted and the above comments, it is our view that the Taxpayer will only have realized a capital gain or loss under paragraphs 39(1)(a) or (b) of the Act upon disposing of his or her claim against M Ltd. The moment at which such a disposition will have taken place may depend on each creditor’s circumstances. However, it is our view that, for creditors such as the Taxpayer who elected to receive the Early Lump-Sum Repayment under the Rehabilitation Plan and who have not previously disposed of their claims against M Ltd., a disposition of such claim will generally be considered to have taken place in the year in which the creditor has received the Early Lump-Sum Repayment. Amounts received from the M Ltd. estate in the form of crypto-assets will generally be considered to have been “received” by creditors such as the Taxpayer under the Rehabilitation Plan when such amounts have been credited to their accounts with a cryptocurrency exchange.

It is important to note that we are also of the view that subsection 50(1) of the Act would not be applicable to deem there to be a disposition of the claim by creditors such as the Taxpayer in such scenarios despite M Ltd.’s insolvency, as the rights initially held by such creditors do not represent debt or shares for the purposes of that provision.

It is also important to note that our conclusions with respect to the nature of the relationship between M Ltd. and its creditors as well as the timing of the disposition of claims by those electing to receive the Early Lump-Sum Repayment (including the Taxpayer) are limited to the case described. In our view, it will be necessary for any particular taxpayer to analyze their respective situations on a case-by-case basis in order to determine the appropriate tax consequences that may result from the failure by an intermediary to deliver crypto-assets under any particular existing agreement. In such situations, the nature of the rights held by a taxpayer against an intermediary and with respect to crypto-assets will be relevant in establishing whether or when a loss can be claimed for tax purposes. Where payments are subsequently received by a taxpayer with respect to a loss, either in the form of crypto-assets or fiat currency, the nature of a payment made will similarly be relevant in determining whether or when such payments should be included in a taxpayer’s income.

For example, in a situation unlike that of the Taxpayer, where it is established that a taxpayer was the beneficial owner of crypto-assets held on account of capital through an intermediary, such crypto-assets were the object of theft or loss, and the taxpayer has received compensation with respect to that theft or loss, subsection 44(2) of the Act may be applicable as the result of the taxpayer having disposed of property (i.e., the crypto-assets). In that case, subsection 44(2) will establish the moment at which the resulting capital gain or loss would have to be included in determining the taxpayer’s income.

CRA response to question 2

It is our understanding that creditors (such as the Taxpayer) who held bitcoin on the Mt. Gox platform and elected to receive the Early Lump-Sum Repayment will receive Bitcoin Cash or, instead, a cash payment in lieu of Bitcoin Cash under the Rehabilitation Plan.  

As indicated previously, we consider that the receipt of crypto-assets and fiat currency as Early Lump-Sum Repayments by creditors under the Rehabilitation Plan will give rise to a disposition of their claims against M Ltd. As such, the fair market value of the consideration received in the form of fiat currency or crypto-assets will have to be included in the proceeds of disposition of the claim disposed of by the creditors (e.g., the Taxpayer) for purposes of calculating their capital gain or loss for the year pursuant to subsection 40(1) of the Act. Since creditors electing to receive payouts in the form of crypto-assets are expected to receive Bitcoin Cash under the Rehabilitation Plan, such units of Bitcoin Cash would have to be included in their proceeds of disposition.

It is also important to highlight that we do not consider that the “forking” of Bitcoin Cash from bitcoin would, in itself, require the Taxpayer to include an amount in income under section 9 of the Act at the time of the “fork”. Indeed, the documentation provided does not allow us to conclude that the Taxpayer had obtained any right to receive Bitcoin Cash from M Ltd. before the conclusion of the Rehabilitation Plan and subsequent payment by the trustee of the estate of M Ltd.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust our comments will be of assistance.

Yours truly,

Charles Dumas
Section Manager
for Division Director
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1 Tokyo Chiho Saibansho [Tokyo Dist. Ct.] Aug. 5, 2015, Hei 26 (wa) no. 33320, translated in Translated and Paraphrased Judgment of Tokyo District Court in Mt. Gox Bankruptcy, UNIV. OXFORD FAC. OF L., https://www.law.ox.ac.uk/sites/files/oxlaw/mtgoxjudgmentfinal.pdf [https://perma.cc/RT26-PRG8].

2 Creditors include those former users who held claims to the bitcoin on the Mt. Gox platform.

3 Former users held claims, and not ownership rights, to the bitcoin on the Mt. Gox platform as noted in the Property Judgment cited at i.

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