Will Your Bitcoin Investments Count When You File for Bankruptcy?

TL;DR

Bitcoin can be considered as a commodity or a currency, and the law is split over the definition.
This can make things difficult, especially in bankruptcy cases.
Different rulings have created a divide, and it’s essential for bankruptcy experts to understand Bitcoin and to arrive at a consensus.

When a person or firm files for bankruptcy, what should happen to their Bitcoin investments is becoming a cause of concern for legal authorities.

The struggle to find a solution to crypto related insolvency cases has become difficult since there is no consensus over what Bitcoin exactly is – whether it’s a commodity or a currency, or something else.

It will take time for legislative bodies to decide the right categorization for Bitcoin and other cryptocurrencies. But courts don’t have that time, especially when it comes to resolving real disputes like bankruptcy.

Bitcoin Identity Crisis

The categorization of Bitcoin as a currency/commodity can have a significant impact on bankruptcy cases.

Bitcoin as a currency

Bitcoin can be used to pay for goods and services, which is why it can be considered a currency. It is accepted all over the world and offers merchants low transaction costs, fast transaction speeds, and safety.

However, it is not endorsed by any country as their currency. This is why it can be considered as an article for barter and not really a legal tender.

Bitcoin as a commodity

Bitcoin can be compared to gold as an asset. For example, both have a particular element of scarcity as there is a finite supply of both. Bitcoin can go up to a maximum of 21 million. Gold and Bitcoin have a finite value, which makes them assets instead of currencies.

How a court perceives, Bitcoin can affect a bankruptcy case, and thus it’s important to define what Bitcoin really is.

Court’s Opinion on Bitcoin

The Case OF CLI Holdings 33 and HashFast Technologies

When it comes to bankruptcy that involves cryptocurrencies, two prominent cases come to mind – CLI Holdings and HashFast Technologies.

Each of these cases pondered on the crypto classification issue, but no definitive decision could be taken. This is why it is still uncertain on how crypto should be treated in any future proceedings related to insolvency cases.

In the CLI Holdings case, a Bitcoin miner borrowed $75,000 for mining equipment. He was supposed to repay the amount using the first 7,984 Bitcoin he mined.

Since the value of Bitcoin shot up, this value became millions of dollars, making the loan repayment an impossible task. The miner discontinued the payments and filed for Chapter 11 bankruptcy. In this case, the court upheld the contract as they seemed to treat the Bitcoin as a commodity.

In the second case, HashFast Technologies transferred 3,000 Bitcoin to another party before filing for bankruptcy. At the moment of transfer, those Bitcoin were worth $363,861.43. When the court proceedings began, the value of those Bitcoins reached $1.3 million. The trustee maintained that Bitcoin is a commodity and should hence be returned to the bankruptcy estate.

The ruling was made partially in favor of the trustee. However, the judgment did not include whether the court considered Bitcoin as a commodity or a currency.

An important point to note here is that the IRS considers Bitcoin to be an intangible asset, which means it can be linked to capital gains/losses.

The Other Side of the (Bit) Coin

Other government agencies and courts have chosen the other side of the divide. For instance, the US District Court for East Texas ruled that Bitcoin is a currency and should be treated as a form of money.

Many merchants have started accepting crypto as a payment method, which makes it closer to a currency than a commodity.

Why Bankruptcy Experts Must Understand Cryptocurrencies

While Bitcoin stays in a divide, over 100,000 BTC transactions take place daily. While many people think Bitcoin is synonymous with cryptocurrencies, there are over 900 cryptocurrencies that exist today.

Many businesses such as Expedia, Subway, PayPal, Shopify, and Microsoft accept Bitcoin as a payment method. As the mainstream use of Bitcoin increases, it will soon be considered an asset of the debtor in cases such as those related to bankruptcy.

This is especially true for companies that stockpile Bitcoin. If a company with many Bitcoin files for insolvency, the crypto assets will need to be evaluated for the bankruptcy case.

Since several companies are widely accepting Bitcoin, it becomes even more important for legal and financial experts to understand the nature of this asset and how a court should treat it for bankruptcy cases.

Conclusion

While the general public might consider cryptocurrencies as currencies, some judgments favor the notion that crypto is inherently a commodity. It is unclear how the classification will be done, but since cryptocurrencies are gaining momentum, the courts will need to settle how these digital assets should be sorted.

Since the technological innovation in this field has outpaced the legal system, the regulatory response is incomplete and fragmented. The US Code needs to be adequately amended to provide guidance on this matter because different classifications will make the divide even wider as different cases give different judgments, classifying crypto in different ways.

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