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With the Mt. Gox Bitcoin exchange offline – at least for now – a primary concern of customers who had accounts there is getting back lost bitcoins – can they be retrieved?
The exact number of Mt. Gox customers at the time the website went dark is uncertain, but as of last December the exchange said it had 1 million.
According to an unofficial “Crisis Strategy Draft” circulating on the Internet, Japan-based Mt. Gox owed its customers 624,408 bitcoins. At current Bitcoin prices of about $500, that’s the equivalent of $312.2 million.
Those who did not bail out before Mt. Gox suspended Bitcoin withdrawals on Feb. 7 are now kicking themselves, commiserating with fellow victims in online forums and trying to figure out if there is any way to get back their lost bitcoins.
Mt. Gox had to shut down because criminals exploited a flaw in the Bitcoin code that allowed them to make duplicate withdrawals from Mt. Gox accounts.
According to the Crisis Strategy Draft, Mt. Gox has lost 744,408 bitcoins, or about $372 million.
Anger from people who had large amounts of bitcoin stored at Mt. Gox spilled out on a Reddit thread entitled, “Gox horror story thread – How much did you lose?”
“160 coins, give or take some small change,” wrote someone going by Falkvinge. “As much as I kick myself for not getting it out, I’m also patting myself on the back for getting most of my holdings out in time, when the writing on the wall became clearer.”
Other Mt. Gox customers fared much worse.
“I am the biggest loser at 4,700+ BTC,” wrote goxloser. “I don’t know how dying feels, but I’m pretty sure that’s how I feel now.”
It’s possible that Mt. Gox could come back online and allow its customers to withdraw their bitcoins – the Crisis Strategy Draft mentions a rebranding and relaunch of “Gox” on April 1 or later. But most in the Bitcoin community assume that the exchange is hopelessly insolvent and, for all practical purposes, dead.
So for those set on getting their lost bitcoins back, is there any recourse at all? Here are the options, such as they are…
Getting Back Lost Bitcoins Is Harder Than You Think
Conventional means of recovering money from a financial institution do not apply to Mt. Gox.
The Japanese government still does not consider Bitcoin a currency and has declined to regulate it. They have said there is nothing they can do.
Mt. Gox itself had no kind of insurance. And there is no Federal Deposit Insurance Corporation (FDIC) to step in and bail out Mt. Gox customers.
Suing Mt. Gox and/or its owners isn’t likely to do much good, either. First off, it would require U.S. customers to file an international lawsuit in Japan under Japanese law. Second, if Mt. Gox is as bad off as indicated in the Crisis Strategy Draft, there may be very little money left to recover.
And finally, owners like Chief Executive Officer Mark Karpeles also aren’t likely to have hundreds of millions of dollars available to pay off disgruntled customers.
Yet there is one option for getting back lost bitcoins – well, a portion of them anyway.
Though the Internal Revenue Service hasn’t outlined its rules regarding Bitcoin, declaring them an investment should be allowed, since that is clearly what those trading the digital currency on Mt. Gox were doing.
That means if the Mt. Gox bitcoins are indeed lost forever, U.S. customers could deduct the losses from their taxes as capital gains losses.
The catch here is that you can’t deduct what the bitcoins were worth when you lost them, only what you paid for them.
So if you bought 10 bitcoins when they were cheap – say $100 – you can only take $1,000 as a capital gains loss, even though Bitcoin prices now are about $500.
But if you bought 10 bitcoins when Bitcoin prices were peaking – say $1,000 – you could take a $10,000 capital gain loss on your taxes. While there is a limit of $3,000 of capital gain losses per year, you can take the rest of the losses in future tax years until you’ve used them all up.
No one will get back all of what they lost using this strategy, but it’s better than a total loss.
Taking a broader view, this episode is not a reason to abandon the idea of investing in Bitcoin. But it does demonstrate the need for regulated Bitcoin investment vehicles that will take steps to protect investors.
Did you have any bitcoins in a Mt. Gox account? If not, do you feel sympathy for those who did, or were they foolish for risking their money in a foreign-based, unregulated Bitcoin exchange? Sound off on Twitter @moneymorning or Facebook!
People who want to invest in Bitcoin without the high risk of unregulated entities like Mt. Gox will soon get their wish when the Winklevoss Bitcoin ETF goes live, which is expected to happen before the end of 2014. Here’s why having a Bitcoin ETF will be such a game-changer…
- Forbes: Bitcoin’s Mt. Gox Goes Offline, Loses $409M – Recovery Steps and Taking Your Tax Losses
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