If any of you understand accounting, do your own taxes or have a personal accountant, I would recommend they write off the USD value investment amount of when the site went dead. File all repayments as other revenues and leave a disclaimer for it. The chance of full repayment is much less then 50% so you need to write it off, debit bad debt expense for the full lost amount (excluding repayments for this entry) and not leave it as a receivables in your assets. GAAP would recommend you do the same, not sure about ISAB principle.
How would you classify it, when writing it off on taxes?
For personal taxes, just write it down as "investment loss", and include an attachment explaining that the bitcoin was bought as an investment, but subsequently lost or unintentionally destroyed. Do it the same way that you would if the bitcoin was sent to an incorrect address, or lost due to a hard drive failure without backup. The loss can offset your profit from conventional investments.
The key is to report the Bitcoin as the investment, and not BTC-Arbs as the investment, because then the IRS may try to check their records for a company named BTC-Arbs, and wonder how you invested in an investment that doesn't exist. But feel free to identify BTC-Arbs as the reason for the loss.
The accounting required to "properly" report bitcoin profits is the reason that most people use brokers (Scottrade, E*Trade, etc) to manage their investment information. Considering how unreportable Bitcoin is, I wouldn't be surprised if the IRS just accepted whatever claims you make, as long as you have some evidence to back it up - if they disagree, you can always file a corrected tax return and completely omit the bitcoin
If & When you get bitcoin back, you can claim it as "recovered losses", which would be considered a profit because you already wrote it off.
In the meantime, BTC-Arbs has a moral obligation to provide statements to customers identifying how much they have lost as of the end of this tax year. At the very least, this would provide some convenience for customers - much like how Gox was partially re-opened so users could see their account balances. This is one of the biggest problems with using unregistered and unregulated investment services. Losses ARE valuable, because they can reduce the taxes owed on other investment gains, but you need a way to show that the losses happened.
