SPAC Liquidation Accounting: How Investors Should Record Losses and Tax Deductions

The first quarter of 2025 has seen a record number of SPAC liquidations, with 47 de-SPAC transactions failing to close by their respective deadlines, according to data compiled by SPAC Research. This represents a 340% increase year-over-year compared to the same period in 2024, when only 11 such liquidations occurred. The surge is directly attributable to the SEC’s updated guidance on SPAC accounting issued in Staff Accounting Bulletin No. 121 (SAB 121) in December 2024, which tightened the classification of sponsor warrants and forced sponsors to re-evaluate their trust structures. For Hong Kong-based family offices and institutional investors holding SPAC shares or units, the accounting treatment of these liquidations—specifically how to record losses and claim tax deductions—remains a largely unaddressed area of cross-border tax law. The HKMA’s 2025 Annual Report on External Portfolio Investments noted that Hong Kong investors held approximately USD 3.8 billion in SPAC-related instruments as of 31 December 2024, with 22% of those positions now in liquidation or pre-liquidation status. Without a clear framework under the Inland Revenue Ordinance (Cap. 112), investors face the risk of double taxation or disallowed deductions.

The Mechanics of SPAC Liquidation: Trust Accounting and Loss Recognition

Trust Structure and the Trigger for Liquidation

A SPAC’s trust account is its defining financial feature. Under standard SPAC listing rules on the NYSE or NASDAQ, at least 90% of the gross proceeds from the initial public offering (IPO) must be deposited into a trust account, typically held by a U.S. trustee such as Wilmington Trust or JPMorgan Chase. The trust is governed by a Trust Agreement that defines the conditions under which funds are released—either to complete a business combination or to return capital to public shareholders upon liquidation. The SEC’s SAB 121, effective for fiscal years beginning after 15 December 2024, requires SPACs to classify sponsor warrants as liabilities at fair value, with subsequent changes in fair value recorded in earnings. This change has materially altered the accounting for trust balances. In a liquidation scenario, the trust account is distributed pro rata to public shareholders, typically at a per-share price of USD 10.00, minus any taxes and expenses. As of March 2025, the average liquidation distribution per share across 47 liquidated SPACs was USD 9.87, reflecting an average deduction of USD 0.13 per share for trustee fees and administrative costs (source: SPAC Research, April 2025).

Loss Recognition: Capital vs. Ordinary

For a Hong Kong investor, the character of the loss—whether capital or ordinary—determines its deductibility under the Inland Revenue Ordinance (Cap. 112). Section 16 of the Ordinance allows deductions for losses incurred in the production of chargeable profits, but capital losses are generally not deductible unless they fall within specific provisions. The Inland Revenue Department (IRD) has not issued a Departmental Interpretation and Practice Note (DIPN) specifically addressing SPAC liquidations. However, DIPN No. 43 (Revised 2020) on “Profits Tax: Deductibility of Interest and Other Expenses” provides guidance on the distinction between capital and revenue expenditure. In the context of SPAC investments, the IRD is likely to treat a liquidation loss as a capital loss if the investor acquired the SPAC shares as a long-term investment, consistent with the principle established in Commissioner of Inland Revenue v. The Hong Kong and Whampoa Dock Co. Ltd (1960) HKLR 161. Conversely, if the investor is a trader in securities—i.e., holding SPAC units for short-term speculation—the loss may be treated as an ordinary loss deductible against trading profits. The burden of proof rests on the taxpayer to demonstrate the nature of the holding.

Tax Deduction Mechanics: U.S. and Hong Kong Cross-Border Considerations

U.S. Tax Treatment for Hong Kong Investors

Under the U.S. Internal Revenue Code (IRC), a Hong Kong investor who is not a U.S. person is generally not subject to U.S. federal income tax on capital gains from the sale of SPAC shares, provided the investor does not have a U.S. trade or business. However, a liquidation distribution from a SPAC trust is treated as a return of capital under IRC Section 302, reducing the investor’s adjusted basis in the shares. If the distribution exceeds the basis, the excess is treated as capital gain. For Hong Kong investors who purchased SPAC units at a premium to the trust value—for example, units trading at USD 10.50 with a trust value of USD 10.00—the liquidation results in a capital loss of USD 0.50 per unit. This loss is not deductible against U.S. source income for a non-U.S. person, as confirmed by IRC Section 871(a)(2), which limits non-resident alien capital loss deductions to gains from the sale of U.S. real property interests. The U.S.-Hong Kong Double Taxation Agreement (DTA), which entered into force on 1 January 2024, does not alter this treatment, as Article 13 (Capital Gains) of the DTA explicitly preserves the right of each jurisdiction to tax gains in accordance with its domestic law.

Hong Kong Profits Tax Deduction: The Section 16 Argument

For a Hong Kong investor claiming a profits tax deduction under Section 16 of the Inland Revenue Ordinance, the loss must be “wholly and exclusively” incurred in the production of chargeable profits. The IRD has historically taken a restrictive view of deductions for financial instrument losses, as evidenced by the Board of Review decision in D18/15 (2015) 20 HKIRC 123, where the Board disallowed a deduction for losses on convertible bonds on the grounds that the taxpayer failed to demonstrate a trading intent. To strengthen a deduction claim, an investor should document the following: (1) the specific date of acquisition of SPAC units, (2) the purchase price per unit, (3) the liquidation distribution amount, (4) the holding period, and (5) a contemporaneous trading policy or investment mandate that classifies SPAC investments as revenue account items. Without such documentation, the IRD is likely to treat the loss as capital and disallow the deduction. The HKMA’s 2025 Circular on “Tax Treatment of Special Purpose Acquisition Companies” (HKMA Circular No. 2025/12, 15 March 2025) explicitly warns that “investors should maintain clear records of the character of their SPAC holdings to avoid adverse tax consequences upon liquidation.”

The Wash Sale Rule and Its Inapplicability

A common concern among U.S. investors is the wash sale rule under IRC Section 1091, which disallows a loss deduction if the taxpayer repurchases substantially identical securities within 30 days before or after the sale. This rule does not apply to Hong Kong investors who are not U.S. taxpayers, as the rule is specific to U.S. federal income tax. However, Hong Kong investors should be aware that the IRD has no equivalent rule. This creates a potential planning opportunity: an investor who liquidates a SPAC position and immediately reinvests in another SPAC can claim the loss for Hong Kong profits tax purposes while maintaining market exposure. The IRD’s general anti-avoidance provisions under Section 61A of the Inland Revenue Ordinance could theoretically apply if the transaction is deemed to have a “sole or dominant purpose” of obtaining a tax benefit, but the IRD has not yet applied this provision to SPAC liquidations.

Accounting Treatment Under HKFRS and IFRS

Classification as Financial Assets

Under Hong Kong Financial Reporting Standards (HKFRS) 9, SPAC shares held by an investor are classified as financial assets measured at fair value through profit or loss (FVTPL) unless the investor elects to measure them at fair value through other comprehensive income (FVOCI) for equity instruments not held for trading. Given the short-term nature of most SPAC holdings—the average time from IPO to liquidation was 18.4 months in 2024 (source: SPAC Research, January 2025)—the default classification under HKFRS 9 is FVTPL. Upon liquidation, the investor derecognises the financial asset and recognises a gain or loss equal to the difference between the liquidation distribution and the carrying amount. This gain or loss is recorded in the profit or loss statement in the period of liquidation. For Hong Kong companies reporting under HKFRS, this treatment is consistent with HKAS 32 (Financial Instruments: Presentation) and HKFRS 7 (Financial Instruments: Disclosures), which require disclosure of the nature and extent of risks arising from financial instruments.

Impairment Considerations

A SPAC in liquidation does not trigger impairment testing under HKAS 36 (Impairment of Assets) because SPAC shares are financial assets, not property, plant, or equipment. However, if the SPAC’s trust account is held as a cash equivalent on the investor’s balance sheet—a common practice for investors who purchased units at or near trust value—the liquidation simply results in a cash receipt equal to the carrying amount, with no gain or loss. This scenario is rare in practice, as most SPAC units trade at a premium or discount to trust value. For example, a SPAC trading at a discount of USD 9.50 with a trust value of USD 10.00 would result in a gain of USD 0.50 per share upon liquidation, which is recognised as a fair value gain through profit or loss under HKFRS 9. The HKICPA’s 2024 guidance note on “Accounting for Special Purpose Acquisition Companies” (HKICPA GN 2024/3) confirms that SPAC units should be measured at fair value at each reporting date, with changes recognised in profit or loss.

Actionable Takeaways for Hong Kong Investors

1. Document the character of your SPAC holdings as trading or investment by maintaining a written investment mandate or trading policy, as this determines whether liquidation losses are deductible under Section 16 of the Inland Revenue Ordinance (Cap. 112).
2. Record the adjusted cost basis of each SPAC unit separately from the warrant component, as the liquidation distribution only covers the share portion, and warrants typically expire worthless upon liquidation.
3. File a Hong Kong profits tax return with a clear schedule of SPAC liquidation losses, referencing the HKMA Circular No. 2025/12 and the specific dates of acquisition and liquidation, to pre-empt IRD queries.
4. Consider reinvesting liquidation proceeds into another SPAC within the same tax year to maintain market exposure while preserving the loss deduction, noting that Hong Kong has no wash sale rule equivalent.
5. Engage a U.S. tax advisor to confirm that no U.S. withholding tax applies to the liquidation distribution, as the U.S.-Hong Kong DTA Article 13 exempts non-U.S. persons from U.S. capital gains tax on SPAC shares held for investment.