TAX RESEARCH PROJECT 2 Researching and Communicating the Internal Revenue Code

Your client, Daemon Targaryen, has come to you for expert tax advice on an unfortunate investment he made in 2021. Daemon is an extremely wealthy businessman and loves making risky investments. After meeting crypto-wunderkind Sam Bankman-Fried (SBF) at a political fundraising dinner, Daemon decided to purchase $3,500,000 of FTT, the native cryptocurrency token of the cryptocurrency trading platform FTX. Daemon carefully studied the variation in the value of FTT over the course of several months. When the price of FTT dropped from $51.02 to $36.94 on May 19, 2021, he decided the time was right for an investment. When trading of FTX opened on May 20, 2021, he purchased 95,238 FTT tokens at $36.75 per token.

FTT is currently trading at less than $1 per token. It is unclear whether Daemon will be able to recover any of his investment because customer deposits in FTX are currently frozen and/or unaccounted for. As of today, Daemon technically still holds rights to all 95,238 tokens. Daemon has several questions that hed like you to answer to understand the tax implications of his situation:

1. How is a gain or loss arising from the sale or exchange of cryptocurrency treated for tax purposes in general?

2. Can Daemon deduct a cryptocurrency loss arising from the collapse of FTX under the general rules you explained in response to number 1? If not, why not? If so, how much may he deduct and in what tax year can he deduct the loss?

3. Daemon has heard that taxpayers can sometimes deduct investment losses if the securities are worthless or if they abandon the investment. Are these options for Daemon? Be specific in the steps Daemon must take if they are viable options.

4. Daemon also heard that investors in Bernie Madoffs ponzi scheme received special tax treatment when Madoff was arrested. Some are calling SBF and FTX a ponzi scheme. What is the special tax treatment for ponzi schemes and is this an option for Daemon?