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Claims From The Mt.Gox Insolvency: Procedure, Taxation, Advice

Mt.Gox - A mountain of questions

Mt.Gox was the world's first bitcoin exchange when it was founded in Japan in 2010. By 2014, Mt.Gox handled up to 80 percent of all bitcoin transactions.

Due to security holes in the software, Mt.Gox had gradually lost several hundred thousand bitcoins by 2014. Ultimately, it was a near total loss. In filing for insolvency in February 2014, the full extent of the disaster became visible. In the meantime, the initially minimal insolvency assets grew to a considerable sum as a result of several transactions to the extent they exceeded the nominal claims. Since then, a large number of international creditors have been fighting for their claims.

Timeline of the Mt.Gox insolvency

2010

18.07.2010: Jed McCaleb (American entrepreneur and later also known for Stellar and Ripple) founds Mt.Gox as the world's first bitcoin exchange

2011

02.2011: McCaleb sells Mt.Gox to Frenchman Mark Karpelès

01.03.2011: Loss of approx. 80,000 bitcoins with the transfer of Mt.Gox

05.2011: Theft of 300,000 bitcoins and subsequent restitution after the payment of a finder's fee

19.06.2011: Compromising of an administrator account to manipulate the market

09.2011: Wallet.dat file, which provides access to the company's bitcoin holdings, is copied by unknown persons

2011-2013

Outflow of almost 630,000 bitcoins enabled by the copied wallet.dat file

Erroneously granted deposits lead to a loss of approx. 40,000 bitcoins

2013

20.06.2013: Disbursement problems of fiat currencies in, for example, US dollars and euros, begin

2014

07.02.2014: Withdrawal stop of all payments, including bitcoins

24.02.2014: Mt.Gox website goes offline

28.02.2014: Mt.Gox files for bankruptcy in Japan

09.03.2014: Mt.Gox files for bankruptcy in the USA

2017

07.2017: Arrest of an individual, presumably responsible for the thefts, in Greece

10.2017: Foundation of the creditor community MtGoxlegal.com

11.2017: Creditors apply for transfer to self-administered insolvency (Civil Rehabilitation)

03.2017: Sale of approx. 40,000 bitcoins to cover the liquidity of the insolvency estate

2018

22.06.2018: Approval of the application and start of preparation for self-administered insolvency

2020

15.12.2020: Submission of the Civil Rehabilitation draft to the court

2021

21.02.2021: Court approval of the Civil Rehabilitation plan

31.05.2021: Start of the vote of the creditors' meeting on the self-administered insolvency proceedings

08.10.2021: End of the vote

20.10.2021: Date for adoption of the Civil Rehabiliation through the creditors' meeting

2022

From 2020: Disbursement of ELSR and IR

 

Facts in detail:

What is Mt.Gox?

Mt.Gox was the first bitcoin exchange (trading platform) worldwide when it was founded in 2010. The company was and is based in Japan. A bitcoin exchange allows its users to trade crypto assets by creating a market for them. For this purpose, money as well as crypto assets, in this case bitcoins, are transferred on the exchange, which can then be used for trading.

Until 2014, a substantial proportion of all bitcoin transactions worldwide was conducted via Mt.Gox. The market share was up to 80 percent of the global volume. Mt.Gox held about 850,000 bitcoins for these purposes, foreign as well as its own. After these were stolen, Mt.Gox had to file for bankruptcy and is under the administration of a trustee.

What happened to the bitcoins?

Mt.Gox had lost about 850,000 bitcoins by the time it filed for bankruptcy. The events that led to this can be traced back to several incidents. 

During the sale of Mt.Gox between Jed McCaleb and Mark Karpelès, approximately 80,000 bitcoins flowed out of the Mt.Gox wallet without a record of any receipt for it. This deficiency was also discussed by the parties, as revealed in chat transcripts released during the criminal trial in the USA.

These 80,000 bitcoins flowed out of the Mt.Gox hot wallet to the - now known - wallet address of 1FeexV6bAHb8ybZjqQMjJrcCrHGW9sb6uF. They remain there, untouched to this day, at least until the private key is found.

How could so many bitcoins have been stolen?

It is still unclear how this theft could have happened. Part of the responsibility for this certainly lies with the operators, who did not ensure sufficient data security. At the beginning of March 2011, the wallet.dat file, which is responsible for all transactions, was copied from the servers.

Due to the compromised wallet.dat file, hackers managed to transfer approximately 650,000 bitcoins directly from Mt.Gox's hot wallet to third-party accounts. These thousands of transfers were long lost in the millions of legitimate transactions but could be reconstructed from the data that became public. To date, approximately 630,000 of the lost bitcoins have been tracked from Mt.Gox's wallet. These were most likely liquidated via several intermediary wallets, obfuscation services and ultimately other exchanges.

Has anyone been held accountable for the acts?

300,000 bitcoins ended up on the BTC-e exchange. The central figure of this exchange is Alexander Vinnik, who has been accused of having "laundered" the stolen bitcoins through the site he co-founded. In 2017, he was arrested in Greece through efforts by U.S. authorities on charges of laundering 4,000,000,000 USD through BTC-e. In France, he was sentenced to five years in prison for this. In principle, it is possible, even if unlikely, that larger quantities from Mt.Gox are to be found among the bitcoins seized by BTC-e and returned to the insolvency estate.

More detailed information on the exact events can be found under https://blog.wizsec.jp/. The WizSec collective consists of experts in cryptotechnology and cybersecurity and has provided extensive insight into their investigations since the events surrounding Mt.Gox began.

How will the Mt.Gox case be processed?

As Mt.Gox is based in Japan, the liquidation of the company will be carried out under Japanese law. In this case, "normal" insolvency proceedings were filed due to a lack of assets, which means that assets are divided among the creditors in fractions. The creditors' claim was valued at the bitcoin rate at that time. Otherwise, the insolvency rates would have been very low.

However, in the course of the insolvency, a forgotten wallet, i.e. a storage medium for bitcoins, was found at Mt.Gox. This was used until June 2011 and contained approx. 200,000 bitcoins which were thus made available to the insolvency estate again. Due to the price increase of bitcoins since 2017, the value of the insolvency estate grew strongly and, in the meantime, has even exceeded the nominal value of the liabilities many times over.

Then there was the emergence of Bitcoin Cash (BCH). This is a hard fork of the bitcoin blockchain, i.e. a split of the bitcoin project. In this context, the same amount of Bitcoin Cash was issued to each holder of bitcoins, which, in this case, also benefited the insolvency estate.

In the course of these events, a petition was filed at the behest of a group of creditors to convert the insolvency into a Civil Rehabilitation in order to avoid the initial lower claims being settled and the price gains being accrued to the shareholders. Through Civil Rehabilitation, it is possible not only to settle the debt in yen but also to issue bitcoins and BCH.

With the conversion of the insolvency into a Civil Rehabilitation, the revaluation of the claim was carried out at market value. To secure the liquidity of the estate, the insolvency administrator also sold several thousand bitcoins. This leaves approximately 140,000 bitcoins for distribution in the insolvency estate.

What should German Mt.Gox investors do now?

Mt.Gox investors liable for tax in Germany have several options for dealing with their outstanding debt:

  • Sale of the claim
    Currently, several companies are offering to buy insolvency claims against Mt.Gox. Through such sales, investors will receive a fixed amount for their claim and will no longer have to wait for payment. For this security, however, these companies offer a lower sum than the repayment would provide.
  • Repayment of the claim
    Initial payments of claims are planned for 2022. These will transpire in several steps and with options. First, an advance payment (small sum repayment) will be made to settle a large number of low claims.
    After this payment, which accrues to all creditors, the creditors have a choice. They can either wait for the repayment of the final insolvency quota (final repayment) or choose an early, reduced payment (early lump sum repayment). The early lump sum repayment is capped at 21 percent of the claim, and the projected insolvency quota for the final payout is approximately 23.6 percent. Both payments are made from the insolvency estate and differ only in the amount and the time of payment. 
    Due to pending proceedings against the insolvency estate, the final payout may be delayed for several more years; the early lump sum repayment is expected to start in 2022.

Regardless of which method is chosen, the payout will be made in yen as well as in bitcoins and BCH. Investors who do not wish to receive coins are given the option by the insolvency administrator to sell them and only receive money.

Our offer: Binding information incl. statement

A final decision by the tax offices as to how this highly complex issue is to be treated for tax purposes is still pending. Accordingly, investors will only gain legal certainty when possibly avoidable tax burdens have already been incurred.

In order to obtain legal certainty prior to the payments of the insolvency estate, we recommend that you obtain binding information from your relevant tax office. The authority must assess the planned action from a fiscal point of view and is permanently bound by this assessment. In addition to a detailed description of the facts, a comprehensive legal statement is also a prerequisite for a successful application.

Binding information at a fixed price

Our experts help you to ensure legal certainty and apply for binding information - at a fixed price. Your contact person is attorney Stefan Winheller. Please contact us at mtgox@winheller.com for further information!

If you have further questions regarding tax law or criminal tax law complications, our experts are always available to help you.

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