FTX Creditors Propose Crypto Asset Payments to Avoid Taxes!

Bittime - A group of FTX creditors recently filed an objection to a reorganization plan filed by FTX's bankruptcy administrator. Indeed, what is FTX's reorganization plan that creditors are raising objections to?

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FTX Creditors File Rejection Documents

The document submitted by the FTX creditor group to the court on June 5 2024, outlines their rejection of the plan because it is deemed not to meet the criteria of the best interest test, contains clauses that do not benefit creditors, and ignores the issue of asset ownership.

Creditors argued that the cash payments proposed in the reorganization plan would actually be detrimental to them because they would potentially result in tax liabilities on the money received. They proposed that payments be made using crypto assets (in-kind repayment) to avoid this tax problem.

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FTX Reorganization Plan That Sparks Controversy

Previously, on May 7, 2024, FTX's bankruptcy administrator announced a restructuring plan that promised full cash payments to creditors. 

The plan offers 118% compensation to creditors with claims under $50,000, payable within 60 days of court approval. 

Other non-government creditors will also receive full payment of their claims, plus interest compensation of up to 9%.

Reasons for Creditor Objections

Sunil Kavuri, a representative of the creditor group, argued that the reorganization plan did not pass the best interests test. He argued that this plan cannot be legally confirmed because it contains exemptions that are unfavorable to interested parties (the estate). Apart from that, the plan is also considered to ignore the issue of asset ownership.

The main objection from creditors is that cash payment plans could trigger tax liabilities. According to them, payments with crypto assets can avoid assets being taxed ( taxable event). Creditors argue that cash payments will force them to pay taxes on profits derived from receipt of the funds.

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Deal with the IRS

In addition to the cash payment issue, the creditors also requested that FTX administrators update disclosure documents regarding the agreement with the IRS. This document needs to include an examiner's report. This objection arose after a tax claim settlement agreement was reached with the IRS.

Under the proposed plan, the IRS would accept $200 million in priority claims within 60 days of approval of the reorganization. Additionally, they will also accept lower priority claims of $685 million, which will be paid after all FTX customers have been paid.

That way, the fate of FTX's reorganization plan is in the hands of the court. The court will consider arguments from both sides, both the bankruptcy administrator and the objecting creditor group. The court decision will later determine the payment scheme that will be accepted by FTX creditors.

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Read Also:

Debtor FTX Reaches Agreement with Bankrupt Voyager Digital

FTX Bankruptcy: New Hope for Creditors, Claim Value Soars 93%

Bankruptcy Company FTX Plans to Start Paying Creditors Before the End of 2024

DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.