Virtual Assets and Bankruptcy

Increasingly more and more individuals and businesses are acquiring virtual assets and questions arise on how these assets will be treated in the context of a personal or commercial bankruptcy.  Virtual assets are property of the bankruptcy estate under 11 U.S. C. § 541.  The commencement of a bankruptcy case under section 301, 302, or 303 creates an estate.  Pursuant to 11 U.S.C. § 541(a)(1), the estate includes all legal or equitable interests of the debtor in property, wherever located or by whomever held, as of the commencement of the case.

In addition, the Internal Revenue Service stated in 2014 that for federal tax purposes, virtual currency is treated as property.  General tax principles applicable to property transactions apply to transactions using virtual currency.  Notice 2014-21, 2014-16 I.R.B. 938.  Furthermore, in Stern v. Marshall, the U. S. Supreme Court held that property interests are created and defined by state law and that unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding, 564 U.S. 462, 495, 131 S. Ct. 2594, 2616 (2011).

The characteristics of virtual assets are different than other property typically seen in bankruptcy proceedings.  With virtual assets, ownership and transfers can be made with pseudonymous.  It is also often difficult to determine when transfers occurred.  The lack of physical form complicates jurisdictional characterizations for courts.  Oversight of virtual assets is also problematic in that it may be difficult to locate, liquidate or sell.

Valuing virtual assets in a bankruptcy is also a thorny issue as virtual assets are highly volatile and values tend to fluctuate dramatically. There is no generally accepted framework or methodology for classification or valuation.  One court held that Bitcoin was not the equivalent of U.S. currency and deferred further consideration of the nature of Bitcoin.  In re Hashfast Technologies LLC, Ch. 11 No. 14-30725 (N.D. Cal. 2014).  Until Congress acts or there is governing case law, Debtors, Trustees and Creditors will need to find a path forward.  Let us help you and your client navigate this emerging area of the law.