DCG must retain Genesis ownership until bankruptcy proceedings conclude. Genesis may lose $700M in tax benefits in certain scenarios.
Genesis, a bankrupt crypto lender, has successfully won a legal bid to prevent its parent company, Digital Currency Group (DCG), from selling or diminishing its ownership stake in the firm until the completion of Chapter 11 bankruptcy proceedings.
This move by Genesis is aimed at securing vital tax benefits, which hinge on its continued status within the tax-consolidated group of which DCG is the common parent.
Genesis Battles to Preserve $700M Tax Benefit in Reorganization Effort
Genesis, which filed for bankruptcy in January following a challenging year for the crypto industry, is seeking to capitalize on approximately $700 million in federal net operating loss carryforwards.
These carryforwards are essential for Genesis, as they can be utilized to reduce its federal income tax liability in both current and future years.
The potential tax savings from these carryforwards are seen as a crucial factor in enhancing Genesis’s cash position, benefiting all interested parties, and contributing to a successful reorganization of the company.
As depicted in Monday’s court order, Genesis imposed restrictions on ownership modifications to safeguard specific tax advantages. These benefits are only valid as long as Genesis maintains its position within the tax-consolidated group that DCG presides over.
If DCG’s stake in Genesis drops beneath 80%, Genesis risks forfeiting benefits associated with nearly $700 million in “federal net operating loss carryforwards,” as indicated by a November motion requesting the prevention of any changes in stake.
Genesis Carryforwards Rooted in 3AC Collapse
According to the motion, the carryforwards of Genesis can be traced back to the 2022 collapse of the crypto hedge fund Three Arrows Capital. Its failure had a widespread impact on the crypto industry, leading to significant losses for other lenders.
As a consequence, withdrawals and trading came to a halt on multiple platforms. The loans extended to 3AC were supported by crypto assets, which had to be liquidated by Genesis.
The repercussions of 3AC’s defaulted loans and failure to meet margin calls had a ripple effect on companies like Genesis and Voyager, leading to financial difficulties due to their exposure to 3AC.
Genesis’s financial difficulties resulted in a bankruptcy filing in January. By blocking the sale or reduction of DCG’s ownership stake in Genesis, the court’s ruling ensures that Genesis maintains the necessary ownership structure to avail of the tax benefits tied to its operating losses.