FTX estate faces estimated $3 to $5 billion in US government claims amid bankruptcy proceedings, court filing shows

U.S. government claims against the bankrupt crypto exchange FTX are expected to total between $3 and $5 billion, according to a court filing on Wednesday, subject to change and negotiations with applicable authorities.

The United States District Court for the Southern District of New York filing stated that the total amount of U.S. tax claims remains uncertain but that once all the government and tax claims are paid, the debtors can use the remaining proceeds to make distributions to shareholders.

However, it is important to note that in accordance with Chapter 11 priorities for the estate, FTX customers, Alameda Research lenders, administrative expenses, and non-governmental creditor claims will be paid out before any government and tax claims.

The debtors propose that 100% of the “SDNY Remission Proceeds” — funds or assets returned to the FTX estate by the U.S. Attorney’s Office for the Southern District of New York or other governmental authorities as part of a remission process — be used for distributions to FTX.com customers and Alameda lenders, including a settlement with BlockFi, per the court filing.

After administrative expenses and non-governmental creditors, up to 25% of the distributable value will be made available to pay claims for U.S. Federal income taxes, with the remainder used to pay claims by the Commodity Futures Trading Commission and other government authorities, the filing noted.

Yet the governmental claims will be put in a Civil Remission Fund and this will be used to pay out to FTX customers and creditors who saw the value of their crypto holdings increase between the petition date and a date immediately prior to the Chapter 11 Disclosure Statement by the Bankruptcy Court — which is estimated for later this year.

This means the order of payments will go:

1. SDNY proceeds will go to FTX customers and Alameda lenders.
2. Aministrative expenses and priority or administrative taxes will then get covered.
3. The estate will pay claims until all non-governmental creditors are made whole in dollar value, including allowed post-petition interest payments.
4. Up to 25% of the remaining value will go to claims for U.S. Federal income taxes.
5. Any remaining value will go to a Civil Remission Fund, which will be used to pay creditors that have seen the value of their crypto increase since petition date.

$24 billion in unpaid taxes

In December, the U.S. Internal Revenue Service stated that FTX owed $44 billion in unpaid taxes, later adjusting the amount to $24 billion — though it is unlikely to be fully recovered.

According to a court filing dated September 11, 2023, the FTX estate reported recovering approximately $7 billion in assets. However, this figure has likely increased in U.S. dollar value in the subsequent months due to the ensuing crypto bull market.

FTX filed for bankruptcy protection in November 2022. Its former CEO, Sam Bankman-Fried, was convicted of defrauding FTX users and investors in November 2023 and is currently awaiting sentencing.

Yesterday, FTX’s current CEO, John J. Ray III, disputed Bankman-Fried’s claim that there was “zero” harm to customers in the platform’s catastrophic collapse, labeling it as “reckless” and “false.”

Update: Added more clarity regarding the Civil Remission Fund and the expected payout distribution order.