Cryptocurrency has moved from the fringe to the mainstream—used for investing, trading, and even international payments—but it comes with volatility, regulatory complexity, and tax obligations. In bankruptcy, crypto is treated as an asset that must be disclosed, valued, and often liquidated, creating unique challenges for debtors, trustees, and creditors alike. Understanding these rules is critical for anyone navigating financial distress in today’s digital economy—read on to learn what you need to know.
The Basics
Cryptocurrency (“crypto”) is a digital form of money that has gained popularity in recent years. Existing only electronically, crypto does not have a cash equivalent. Touted as providing financial freedom from big banks’ regulations and red tape, there is no central banking or governmental authority that manages crypto, and it is instead managed by peer-to-peer networks. An individual can obtain cryptocurrency in several ways including but not limited to buying it in exchange for U.S. dollars via a bank account, debit card, or wire transfer, earning it through work or services, or by mining it using computer hardware to validate transactions and earn rewards.
Crypto is most used for investing and trading through platforms like Coinbase, Binance.US., and Kraken. Federal law has expanded for consumers to invest in crypto in their retirement accounts. It is also often used for sending money internationally to take advantage of low fees. While all transactions involving crypto are publicly visible and permanently recorded, the wallet addresses are not tied to personal identities. Some of the most popular types of cryptocurrencies include Bitcoin, Ethereum, and Stablecoins. Despite its prevalence, crypto is not without its risks. Security concerns, volatility, fraud, and regulatory uncertainty often plague the world of crypto.
While crypto is not legal tender in the United States, it is taxable by the Internal Revenue Service (IRS). The IRS treats crypto as property, not currency, and someone in possession of crypto is required to report capital gains and losses when it is sold, traded, or used in other ways. Even converting one type of crypto to another is a taxable event. Furthermore, regulated exchanges must comply with Know Your Customer and Anti-Money Laundering laws. The Securities and Exchange Commission (SEC) regulates some cryptocurrencies as securities, and the Commodity Futures Trading Commission (CFTC) oversees crypto derivatives such as future contracts.
What if Your Bankrupt Customer Has Crypto?
Courts categorize crypto as an asset, which means that debtors must disclose cryptocurrency holdings, just as they would bank accounts, investments, or real estate. Additionally, crypto holdings are part of the debtor’s bankruptcy estate, meaning that bankruptcy trustees should be able to access the crypto to pay creditors. Those who are filing for bankruptcy are required to report all crypto holdings in as much detail as possible (i.e., purchase dates and value of the crypto at filing). Creditors can ask questions and request information about such assets as part of the bankruptcy process.
The volatility of crypto creates unique problems for bankruptcy. First, crypto is prone to rapid price swings. Because of this reality, trustees often value the crypto as its market price on the date that the bankruptcy was filed. Crypto is generally a non-exempt asset so it is subject to liquidation unless there is a federal or state exemption, probably under a “wild card” or “any property” exemption (no specific exemptions for crypto are known at this time). If liquidating the crypto will take time, some trustees monitor changes in the cryptos value since it can drop or rise significantly after filing. Similarly, some courts have adopted practices to periodically reassess crypto values during lengthy cases to prevent creditors from missing out on possible gains. Chapter 13 bankruptcy may allow debtors to retain their crypto holdings provided that the asset’s value is factored into their overall financial standing and monthly payments. In this situation, crypto assets are assessed as disposable income.
Seeking Legal Guidance
Considering the increasing prevalence of cryptocurrency, it is important for creditors to know all the avenues available to them when recovering from debtors. Bankruptcy cases move fast, so it is important to follow any deadlines or appear at meetings set by the bankruptcy court.
The attorneys in Perkins Thompson’s Creditors’ Rights & Bankruptcy practice group are here to help guide parties through commercial and consumer bankruptcy, insolvency, and recovery matters involving cryptocurrency. For assistance with these issues, please contact Anthony Manhart.
*Special thanks to Natalie Jump (Maine Law 2026 anticipated) for her assistance with this article.
