Tax Treatment of SEC Compensation Payment For Cryptocurrency

[Fraser217]

Hello
In the tax year 23/24 I received a compensation payment of $531.81 (£411.43) from the SEC in the US for the cryptocurrency Veritaseum.

https://verifairfund.com/

I purchased a total of 4.1 Veritaseum tokens in 2017 and 2018 for a total cost of £437 (as of time of writing now worth £100). Following the compensation I still hold these tokens.

I wonder whether I should declare this on my self-assessment tax form as Miscellaneous Income, or should I treat it as a Capital Gain on my Veritaseum holding with a cost basis of zero since no Veritaseum was disposed of. Or would neither apply?

I note on https://www.investopedia.com/terms/c/chargeable-gain.asp it says :
"Chargeable gains can include compensation received for damages to or the destruction of an asset."

so I wonder if that might apply to my case. The value of my asset decreased because of the failure of Veritaseum Inc. to properly adhere to securities regulations.

The payment of $531.81 breaks down into a Total Loss Amount of $510.47 and a Reasonable Interest of $21.34.

I received a form from IRS in US stating I am exempt from any tax payment to them.

If there was any doubt should I just declare it as Miscellaneous Income to be on the safe side - then either way I have paid (not less than) the right amount of tax?

Here are a couple of excerpts from the letters I received regarding this compensation :

"Dear Veritaseum Fair Fund Claimant,
On November 1, 2019, the Court entered a final judgment in the captioned civil action brought by the Securities and Exchange Commission, creating the Veritaseum Fair Fund pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002 so that collected civil penalties, along with collected disgorgement and prejudgment interest could be distributed to harmed investors."

"Your claim filed with the Veritaseum Fair Fund (the “VERI Fair Fund”) has been reviewed in accordance with the standards set forth in the Distribution Plan (the “Plan”) approved by the United States District Court for the Eastern District of New York on February 17, 2021. This email is to notify you that, based on this review, the Distribution Agent for the VERI Fair Fund has determined your claim to be sufficient, and your claim has been accepted. We have preliminarily calculated the U.S. Dollar value of your Total Loss Amount1 as $510.47."

Many thanks
Fraser

[AGoodman]

If I understand correctly, you paid £437 for the tokens, they were sold or rendered worthless, and you received compensation of £411 plus still have tokens with a low value.

It's definitely not income other than potentially the interest of $21.

You only need to look at whether to declare for CGT if you have other gains or significant disposals that would mean you having to declare them. Do you have other (net) gains of over £3k?

[Fraser217]

@AGoodman: Thank you for reply. Yes I have other capital gains over the AEA of £6000 for year 23/24, so I will have to declare all my capital gains for this year.

So should I declare the Total Loss Amount component of $510.47 as a capital gain on the cryptoasset Veritaseum and the Reasonable Interest component of $21.34 as Miscellaneous Income? I would take the cost basis for the Veritaseum capital gain to be zero since I was not required to give up any of my Veritaseum tokens to obtain the compensation. My Veritaseum tokens are worth about £100 just now but I am not in the market to sell them.