The relatively new nature of cryptocurrency raises interesting questions when you’re talking about bankruptcy, divorce, and other legal matters. While it is a form of cryptocurrency, it is handled and stored completely differently than more traditional forms of currency—what does this mean for you if you need to declare bankruptcy? The team at Padgett & Robertson can help. Our extensive knowledge of and experience with bankruptcy allows us to answer your most complex questions. Call us at 251-336-3695 to set up a consultation with our team now. One of the biggest misunderstandings regarding cryptocurrency is its traceability. In its early days, cryptocurrency was difficult to trace, and few people understood it. It is now so mainstream that this is no longer the case. While cryptocurrency is harder to locate and trace than conventional currency, it is certainly not impossible to find. Companies like Coinbase help bankruptcy trustees locate accounts, transfer assets, and create trustee accounts. If you have cryptocurrency, you cannot exclude it from your bankruptcy filing or try to keep it hidden. To do so is bankruptcy fraud and can lead to serious legal problems for you. Not sure where to declare your cryptocurrency? Discuss it with your attorney. Bankruptcy involves extensive paperwork and documentation, and you do need to include your cryptocurrency just like you would include any other asset. Cryptocurrency is not handled differently than other assets in bankruptcy. Just like any other assets that go above and beyond what you are allowed to keep, cryptocurrency can be seized, sold off, and used to pay back your debtors. Platforms like Coinbase can even help trustees with this step. The trustee assigned to your case will look over your assets and income to determine whether or not you qualify for bankruptcy. If your assets exceed what is allowed, they may seize them and sell them. Another important thing to know: it is not just your current cryptocurrency that you have to worry about. At the time of your filing, you will need to document any assets you have sold or exchanged in the past month. If you fail to do so, the bankruptcy trustee may consider that fraud and dismiss your case. It is important to note that you may very well be able to keep your cryptocurrency as you proceed with your bankruptcy case. The majority of filers do not have any assets seized, thanks to exemptions permitted in each state. While the laws do not specifically address cryptocurrency as an asset, most states do have a wildcard exemption—Alabama included. This exemption allows you to exempt anything not covered under other categories. Alabama’s wildcard exemption allows you to keep up to $8,225 of any personal property, with the exception of compensation. As long as your cryptocurrency is worth less than the current limit, you may be able to keep it. Bankruptcies involving cryptocurrency can be challenging. Cryptocurrency is volatile, so what’s worth $1,000 today could be worth $10,000 tomorrow. Any assets that see a significant change in value throughout the course of your bankruptcy could affect whether or not your debts are discharged. Furthermore, you’ll need to know how best to use exemptions to keep as much of your property as possible. Your next step should be reaching out to an attorney. Bankruptcy is a complicated process, and any missteps could delay your debt discharge or cause it to be dismissed entirely. With the help of a bankruptcy attorney, you can feel confident that you are giving yourself the best shot at a fresh start. At your consultation, make sure you have information on your current crypto holdings, any transactions you have made in the past 30 days, and estimates of your cryptocurrency’s current value in American dollars. Are you ready to find out if bankruptcy is the right choice for you? The team at Padgett & Robertson is committed to helping you sort out your options. To set up a free consultation now, just call us at 251-336-3695 or fill out our online contact form.Cryptocurrency Must Be Declared
Trustees May Seize and Sell Cryptocurrency
When Cryptocurrency May Be Exempt from Seizure
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FAQs
Bankruptcy and Cryptocurrency: Understanding the Implications? ›
Trustees May Seize and Sell Cryptocurrency
What happens to my crypto when I file bankruptcy? ›In the event of bankruptcy, crypto customers with custodially held assets are typically last in line to receive payment. In other words, those who have their cryptocurrencies locked away in non-custodial or self-custodial wallets won't be affected since they own the private keys.
Can crypto be clawed back in bankruptcy? ›Commingling of digital assets
Only transfers of a debtor's assets are subject to clawback claims. Pre-bankruptcy crypto transactions may not involve the transfer of a debtor's property if the assets transferred belonged to customers and were merely held in trust by the debtor for the benefit of such customers.
In most cases, bitcoin and cryptocurrency can be garnished by judgment creditors. It is a common misconception that bitcoin and other cryptocurrencies cannot be garnished.
Is crypto exempt from bankruptcy? ›Cryptocurrency is not handled differently than other assets in bankruptcy. Just like any other assets that go above and beyond what you are allowed to keep, cryptocurrency can be seized, sold off, and used to pay back your debtors. Platforms like Coinbase can even help trustees with this step.
Do I have to file crypto if I lost money? ›You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.
Can crypto assets be seized? ›Law enforcement can now seize crypto assets and crypto-related items (e.g. seed phrases and wallets, etc.) as part of investigations without arrest warrants, and apply new crypto asset freezing orders against crypto asset services, thus expanding their ability to act swiftly and decisively.
Is it possible to get money back from a crypto? ›Crypto is a very high-risk and volatile investment. The value can go up or down quickly and there are no guaranteed returns. If you lose your money to a crypto scam, your money is likely gone.
Should I cash out crypto to pay off debt? ›The IRS sees crypto as property, not currency. That means cashing out crypto for fiat currency is a taxable event, even if you're just paying off debt! I know, I know, taxes are no fun to think about. But ignoring crypto taxes can lead to penalties, interest, and other headaches down the road.
How do I liquidate crypto without paying taxes? ›There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.
Can you lose crypto in a divorce? ›
Under the law, cryptocurrency is considered a marital asset and subject to division in divorce proceedings. This means that if either spouse invested in or acquired cryptocurrency during the marriage, it will be included in the assets to be divided.
Can you deduct crypto losses from income? ›If you dispose of your crypto for less than it cost you, you may have a capital loss. Capital losses can be used to reduce your capital gains in the current or future income years.
Who gets the money when you get liquidated in crypto? ›In summary, when a trader is liquidated on a crypto futures trade, the money is used to cover their losses, and any remaining funds may be returned to the trader after fees and expenses are deducted. However, if the losses exceed the available margin, the trader may be responsible for paying the difference.