What Happens to Cryptocurrency in Bankruptcy?

Cryptocurrency and digital assets are now mainstream. Many of our clients own Bitcoin, Ethereum, or even NFTs, and some hold crypto ETFs or other blockchain-based investments. But if you’re considering bankruptcy, you may wonder: what happens to my cryptocurrency in bankruptcy?

When you file for bankruptcy, all of your assets become part of the bankruptcy estate—not just physical items like cars or houses. Bankruptcy law looks at both tangible and intangible assets, including bank accounts, stocks, retirement accounts, and yes, cryptocurrency. Your crypto is treated just like any other property and must be disclosed and valued.

Before you file bankruptcy, it is important to understand how digital assets are treated in Chapter 7 and Chapter 13 bankruptcy, how they are valued, and the key steps to protect them.

Understanding Cryptocurrency and Digital Assets

Before we dive in, here are some quick definitions:

• Cryptocurrency: Digital currency built on blockchain technology (e.g., Bitcoin, Ethereum, Solana).

• Stablecoins: Crypto pegged to a stable asset (USDC, Tether).

• NFTs: Non-fungible tokens, often representing digital art or collectibles.

• Crypto ETFs & Funds: Traditional investments that track crypto prices (e.g., Bitcoin Spot ETFs approved in 2024).

• Wallets: Storage for your crypto, including hot wallets (online) and cold wallets (hardware).

Each of these must be disclosed in bankruptcy, just like bank accounts, cars, or real estate.

How Cryptocurrency Is Treated in Bankruptcy

In Chapter 7

• Becomes Property of the Estate: The bankruptcy trustee will ask you to list all cryptocurrency on Schedule A/B.

• Valued on the Filing Date: Your crypto is priced at the market value on the day you file.

• May Be Sold: If not fully protected by exemptions, the trustee can sell your crypto to pay creditors.

In Chapter 13

• You Keep Your Crypto: But its value can increase your plan payment under the “best interest of creditors test.”

• Future Gains Stay with You: Typically, post-filing price gains do not have to be turned over, but always disclose significant changes to your attorney.

Protecting Your Cryptocurrency in Bankruptcy with Exemptions

In Virginia, you may be able to use:

• Wildcard Exemption: Up to $5,000 per person (more if 65+ or a disabled veteran).

• Cash/Miscellaneous Property Exemptions: Crypto is usually treated like cash or a financial account.

• Tenants by the Entirety (TBE): Some investment accounts can be titled as Tenants by the Entirety. If the crypto is jointly held with a spouse and no joint unsecured debt, TBE may protect certain accounts.

• Retirement Accounts: If your crypto is held as part of your retirement account (IRA, 401(k), etc.), then it is entitled to the protection as a retirement account. Typically retirement accounts are fully protected.

Your attorney will help maximize these exemptions and time your filing for best protection.

Valuation Challenges of Cryptocurrency during Bankruptcy

Crypto markets move fast. Trustees typically use a major exchange price at the time of filing. If your Bitcoin spikes in value right after you file, that increase might still go to creditors in Chapter 7 if the asset was not exempted. Timing matters.

NFTs, Tokens, and ETFs

Even if your NFT is “just a JPEG,” it still counts as property. List it, even if its resale value is $0. Crypto ETFs in brokerage accounts are disclosed and treated like stocks.

Common Mistakes to Avoid

1. Failing to Disclose Crypto: Omitting assets can result in denial of discharge or fraud allegations.

2. Transferring or Gifting Crypto Before Filing: This can be considered a fraudulent transfer.

3. Assuming Hardware Wallets Are Private: Trustees can and do ask about wallets.

4. Forgetting About Tax Consequences: Selling crypto before filing may trigger capital gains taxes.

Example Scenarios of Crypto in Bankruptcy

• Scenario 1: Chapter 7 with $3,000 in Crypto
  A filer uses Virginia’s wildcard exemption to protect the entire amount. The trustee cannot sell the crypto.

• Scenario 2: Chapter 13 with $20,000 in Crypto
  The filer keeps the crypto but must pay unsecured creditors at least the value of the non-exempt portion over the life of the plan.

Frequently Asked Questions

Do I have to sell my crypto before bankruptcy?
No, but you will need to exempt it. If you cannot exempt it, then  you want to talk to your attorney about selling it and using the money or whether you want to let it go. Selling before filing could create tax issues. If a trustee sells the crypto, the trustee has to pay the taxes.

What if my crypto exchange went bankrupt?
You still must disclose any claim you have against the exchange as an asset.

Can I keep trading crypto during Chapter 13?
Usually yes, but consult your attorney before making large trades.

What if I lost access to my wallet?
Document the loss, but disclose the existence of the wallet and explain what happened.

Final Thoughts

Cryptocurrency isn’t invisible in bankruptcy—it’s treated like any other asset. But with proper planning, you can often keep some or all of your crypto. At Ashley F. Morgan Law, PC, we help Virginia residents review their assets (including cryptocurrency), evaluate their options, and exemption plan to protect as much of their assets as possible.