FTX Settles $200M Tax Bill with IRS

The bankrupt cryptocurrency exchange, FTX, reached a tentative deal with its largest creditor—the United States Internal Revenue Service (IRS). A filing on June 3 detailed that both FTX and the IRS have come to an agreement to settle a substantial $24 billion tax dispute. Initially, the IRS had claimed that FTX owed over $44 billion in taxes, but this figure was subsequently reduced to the current amount. The finalization of this settlement, Is contingent upon court approval of FTX’s reorganization plan.

According to the terms of the agreement, the IRS would resolve its $24 billion claim by receiving $200 million as a priority tax claim. This amount is to be paid within 60 days after the court approves the reorganization plan. The IRS will also receive $685 million as a subordinated claim, which will be paid only after the customers and other creditors are compensated. This agreement covers all tax claims up until October 31, 2022.

FTX has stated that this settlement helps in reducing the litigation risks and provides greater certainty regarding the recovery process for creditors and customers. The tax implications involved in this case are both novel and complex, as highlighted in the filing, adding to the unpredictability if the matter were to be litigated further.

Notably, FTX does not deny that it owes taxes, but it contests both the amount claimed by the IRS and the specific grounds for the tax liability. FTX argues that it should not be taxed on the funds misappropriated by its former CEO, Sam Bankman-Fried. The exchange takes issue with the IRS’s calculations concerning employment taxes linked to the salaries paid to Bankman-Fried and other top executives.

FTX has also claimed it possesses valid deductions and losses that the IRS has disallowed due to inadequate documentation. Despite these contentions, the IRS held firm in its stance and was prepared to pursue significant tax liabilities against FTX. An IRS representative conveyed in the filings that without a settlement, the IRS would continue to seek these liabilities through legal avenues.

Alongside the tax settlement, FTX put forward a new plan on May 8 aimed at repaying its creditors. This new plan targets the full reimbursement of all claims and includes some additional compensation. Creditors with owed amounts below $50,000 will be eligible for a recovery of 118%, which FTX has estimated applies to about 98% of its creditors by number.

The repayments to creditors will be determined based on the value of assets at the time of FTX’s collapse in November 2022. This ensures that the repayment figures are grounded in the most accurate financial context available at the time of the company’s downfall.

FTX’s tentative agreement with the IRS is a significant step toward resolving its massive tax liabilities, though the plan still hinges on court approval. This agreement aims to mitigate uncertainties and provide clarity for the exchange’s creditors and customers moving forward.