On November 1, 2024, the IRS released an Office of Chief Counsel memorandum (the “Memo”), which detailed when frozen digital asset rewards held on bankrupt digital asset platforms should be included in gross income.

The Memo examined a hypothetical taxpayer who received rewards from activities and staking (which we discussed here, here, here and here) which were deposited into an account on a digital asset platform. The platform filed for bankruptcy later in the same year in which the rewards were received, and under the bankruptcy rules, the customers’ accounts were frozen and remained frozen for the rest of that taxable year.

The Memo concluded that the taxpayer must currently include rewards received before the bankruptcy because the taxpayer had dominion and control over the rewards—the taxpayer actually received the rewards and could have sold, exchanged or transferred them before the bankruptcy filing.

Bankruptcy implicates other crypto-related tax issues beyond those discussed in the Memo, some of which we discussed here (in the context of FTX’s bankruptcy). Taxpayers who hold crypto on bankrupt digital asset platforms may wish to consult their tax advisors regarding the Memo and other tax issues.