[wtvanhest]

It may depend on why the exchange went insolvent.

If it is not a technical problem, and is rather a Ponzi Scheme, the tax implications may be much different since there are IRS rules that handle Ponzi Schemes. Additionally, those that gained profits in the exchange may be required to pay back those profits to victims through clawback lawsuits+.

This IRS link below is a brief overview of how victims of Ponzi Schemes are treated. The most important piece of information is that there is a real chance of a clawback for the people who withdrew and currently think they made money.

http://www.irs.gov/uac/Help-for-Victims-of-Ponzi-Investment-...

I don't have time to read these documents this morning, but I do know that the people who received returns from Madoff are now the focus of lawsuits.

Here is a Forbes article on the subject, there are plenty more you can read out there as well: http://www.forbes.com/sites/jordanmaglich/2012/10/23/ponzi-s...

Here is one example of a hospital having to pay a Clawback. http://www.jewishpress.com/news/breaking-news/hadassah-docto...

+My guess is that the clawback lawsuits would yield very little real money since much of the value of Bitcoined gained was due to price appreciation which may keep lawsuits against those who gained fairly minimal since there isn't much money for lawyers to sue for in complex litigation.

[zAy0LfpBZLC8mAC]

Noone was promising any returns, so how could this possibly be a ponzi scheme?

[gamblor956]

A Ponzi Scheme is legally defined as a fraudulent investment operation that pays earlier investors returns out of the investments of subsequent investors. A promise of returns is not necessary.

[zAy0LfpBZLC8mAC]

Well, and how is "give us your money and you'll later get it back, just minus some fees" possibly an investment operation, be it fraudulent or not? I mean, where did MtGox ever suggest they would pay any returns, let alone where did they ever pay returns?

[wtvanhest]

You bring up an interesting point. I reviewed a wiki list of Ponzi schemes and assuming that is an exhaustive list I have to agree with you that the generally accepted definition is that you must say you are doing something with the money to benefit the investors for it to be a 'Ponzi Scheme'.

http://en.wikipedia.org/wiki/List_of_Ponzi_schemes

The fact that it doesn't fit the wiki or generally accepted definition of a Ponzi Scheme does not rule out the possibility that it still may be considered one but after spending some more time considering it, it does not look like a true Ponzi Scheme, even if the CEO did directly steal the money and use new money to pay old BTC buyers.

[zAy0LfpBZLC8mAC]

Well, what pretty much rules out that MtGox will be considered a ponzi scheme is that if it were, "ponzi scheme" would essentially be a synonym for "fraud".

Suppose MtGox wasn't a bitcoin exchange, but rather sold cars, which had to be ordered and paid for in advance. Now, suppose further that the CEO "stole" cars from the company and then bought new ones using the money from new customers when he needed to deliver a car to one of the earlier customers. That's just plain old fraud, not a ponzi scheme, and it doesn't become a ponzi scheme just because it's money instead of cars - and in particular, you as an earlier customer certainly are not liable for the losses of later customers.

edit: I mean, MtGox under the assumption that the loss was not due to a technical problem, if it way due to a technical problem, it's obviously not a ponzi scheme anyway.

[wpietri]

Must Ponzi schemes guarantee returns? Madoff, for example, pretended to be a normal financial trading operation, just one with unusually good returns.

[zAy0LfpBZLC8mAC]

Well, I guess I phrased it badly, but I didn't mean a guarantee of returns, but rather just anything even suggesting it being an investment - that is to say, suggesting that it might possibly produce returns.

Madoff did not say "give me your money and you'll later get back the exact same amount, just minus some fees", I suppose? But that's what MtGox did - there was just no investment aspect to it.

[wpietri]

Plenty of people were buying Bitcoins because they thought they would increase in value, which sounds like an investment to me.

[zAy0LfpBZLC8mAC]

You are confusing the thing sold through MtGox with the thing sold by MtGox. MtGox sold the service of storing your money and of connecting you to trading partners and settling trades with those trading partners, that is what exchanges do - they didn't sell bitcoins.

It's like confusing eBay and paypal with some eBay seller: eBay and paypal don't sell clothes, say, they only help you find someone selling clothes and then (optionally) help with the settlement, the payment in particular.

And that's not just a formal distinction: On an exchange (like MtGox or any foreign currency exchange or stock exchange ...), the price for the traded commodity is not set by the exchange, but by the traders using the exchange. The exchange only sets the price for its service of connecting you with a counterparty, but the price for the stocks or bitcoins or whatever sold through the exchange is set by the trading partners, and the exchange also never takes on any of the investment risk, when you sell stocks, the counterparty gets the stocks, you get the money they paid, the exchange only does the bookkeeping.