What are bitcoins?
Bitcoin is a complex but anonymous peer to peer system that allows the creation, storing, and trading of a virtual currency that uses units, called “bitcoins,” to represent value. The system is unregulated and the value of individual bit coins has been proven to be highly volatile as trust in the system has waxed, waned, and waxed again.
Since bitcoins are anonymous and not really money, do I have to disclose them in my bankruptcy case?
Yes! Assuming your goal is not to go to jail; you need to disclose all appropriate assets in a bankruptcy case. Failure to disclose any assets can result in a loss of discharge under 11 USC 727. Additionally, bankruptcy petitions are signed under penalty of perjury; a false statement is a crime punishable by up to a $5,000 fine and five years of imprisonment for each incident. Intentionally failing to disclose assets in a bankruptcy case is never worth the risk. One jealous neighbor or estranged partner is all it takes to provide a tip to the U.S. Trustee’s Office.
What happens to bitcoins in a bankruptcy case?
Bitcoins get disclosed on the Schedule B Form and are made available to the bankruptcy estate. If the debtor has available exemptions to protect them then, then the Debtor can claim an exemption on the Schedule C form to protect them. Exemptions are protections that can be applied to certain classes of property under state or federal law; they vary based upon jurisdiction.
What kind of exemptions can be used for bitcoin?
At the time of this writing, there is not much case law to answer this question from the Bankruptcy Court itself in Massachusetts. However, we can look to some federal regulation to find some suggestions about how to classify them to determine their treatment and what exemptions can be used on them.
Considering the absence of state and federal law regarding bitcoins, a bankruptcy court would likely look to the IRS’s position. The IRS has decided that bitcoins are property and not a currency.
To find out why being labeled property matters, let’s first examine an improper exemption to use for bitcoins. The Massachusetts exemptions contain an exemption for “$2,500 in cash or savings or other deposits in a banking or investment institution.” Bitcoins present two problems to the use of that exemption. Bitcoins under the IRS Position are not dollars and a bitcoin exchange or wallet is not in a banking or investment institution. While money sitting in a bitcoin account may feel like it is sitting in a bank account, it is not money in a banking or investment institution.
Bitcoins are units of value and look much like a currency; however the bankruptcy code is drafted in terms of dollars. The best we can do is approximate their value by examining the exchange rate on the petition date (the day a case is filed.) Although that sounds like the same process for a foreign currency, bitcoins are not currency. They are property that has a value in dollars supported by the demand for them.
While every case and situation is different, in all likelihood bitcoin would most likely need to be covered with either the Massachusetts wildcard or Federal wildcard exemption.
What if I get the exemptions for my bitcoins wrong?
They will become an asset of the bankruptcy estate and the Bankruptcy Trustee may elect to take them, sell them, and the use the proceeds to pay your creditors after taking an administrative fee.
As of the date of this writing I have not heard a trustee ask about virtual currencies, but the possibility of misclassification without exemption makes the area ripe for savvy chapter 7 trustees.
Want to learn more about bitcoin in Massachusetts?
If you are looking for more to read about bitcoins in Massachusetts, check out the Massachusetts Law Library page on bitcoin.