FTX Reaches Settlement with IRS Over $24 Billion Tax Claim

Bankrupt crypto exchange FTX has reached a settlement with the Internal Revenue Service (IRS) over a substantial tax claim. The IRS initially claimed that FTX owed $24 billion in taxes, but the dispute has been resolved with FTX agreeing to pay a much lower amount.

Settlement Details

According to court documents filed on Monday, FTX will pay the IRS a priority claim of $200 million within 60 days of the firm’s restructuring plan taking effect. Additionally, the IRS will receive a $685 million junior priority claim, which will be paid on a subordinated basis to customers and other creditors, depending on the availability of funds following the distribution plan.

Background of the Dispute

The IRS’s original claim of $24 billion was contested by the FTX bankruptcy estate last December. Audit firm EY estimated that FTX’s highest earnings from operating the exchange were $334 million, translating to a tax liability of $34.7 million. This significant discrepancy led to negotiations that ultimately reduced the amount FTX agreed to pay.

Path to Creditor Recoveries

With the IRS settlement, FTX can proceed with its plans to distribute recovered funds to creditors. Last month, the FTX bankruptcy estate announced that 98% of creditors would receive at least 118% of their allowed claims in cash within 60 days of the reorganization plan taking effect. The estate has accumulated between $14.5 billion and $16 billion to fund creditor recoveries.

Despite this progress, some creditors are dissatisfied with the fact that claims will be paid based on the prices in November 2022. FTX creditor Arush Sehgal criticized the recovery percentages, calling them “a false narrative” and “an insult to creditors.”

CEO’s Response to Creditor Grievances

FTX’s interim CEO John Ray III acknowledged the grievances in a letter to Judge John Kaplan, who is overseeing the exchange’s bankruptcy proceedings. Ray admitted that Sam Bankman-Fried’s victims would never be fully restored to their original economic positions before the fraud. “In other words, a victim who had bitcoin on FTX on November 11, 2022, will receive a distribution…400% lower than the value today,” Ray stated.