Can Cryptocurrency Be Garnished?


Can Cryptocurrency Be Garnished?

Cryptocurrency – which includes things such as Bitcoin, Ethereum, and others – has taken the world by storm. This new “digital currency,” which was worth just pennies per unit back when it first launched in the late 2000s, has increased greatly in value in recent years. Bitcoin, the first type of cryptocurrency and presently the most valuable, routinely commands a market price in the mid five figures, with some experts predicting a value in the six-figure range in the near future. Of course, cryptocurrency has plenty of naysayers, including former hedge fund manager Dr. Michael Burry. Dr. Burry, who famously foresaw and profited from the financial crises of 2007-2008, has stated that Bitcoin and other virtual currencies will likely fall to zero when governments ultimately crack down on them. In this post, we’d like to take a look at one issue which will probably gain importance as time rolls by: can cryptocurrency be garnished? The IRS has officially labeled cryptocurrency as a form of legitimate personal property, subject to income taxation, reporting, and other requirements. This begs the question: if crypto is legitimate property, then can it be attached in a post-judgment garnishment action? Let’s take a look.

Post-Judgment Discovery Process

After a creditor wins a judgment against a debtor, that debtor is required to make disclosures about his or her assets in a post-judgment discovery process. While under oath, the debtor is required to provide a full account of his or her assets – this includes the location of assets, value, type, and so forth. This includes cryptocurrencies, even though cryptocurrencies are not stored in traditional mediums, such as banks or safety deposit boxes. During the discovery process, the debtor is required to reveal any identification numbers or passwords associated with digital wallets or third-party cryptocurrency storage entities, such as Coinbase. If the debtor fails to fully disclose all pertinent information, this can result in a finding of contempt of court.

Can Cryptocurrency Assets Be Garnished?

The short answer to this question is: probably. But the longer answer is that garnishing cryptocurrency assets would likely be hard to operationalize in certain contexts, particularly when it comes to foreign cryptocurrency accounts. A Writ of Garnishment is essentially an order for a third-party which owes money to the debtor to transfer the money directly to the judgment creditor, rather than the debtor. In other words, it is basically an interception of the funds which would otherwise flow from the third-party to the debtor. Garnishment orders are typically issued on employers or banks. An employer, for instance, might receive a garnishment order which requires the employer to pay a certain percentage of an employee’s paycheck directly to the judgment creditor. In this way, the judgment creditor receives the payment and there is no possibility for the debtor to interrupt the process. If a debtor holds cryptocurrency assets in a third-party entity, such as Coinbase, then presumably a garnishment order could be served and Coinbase could transfer assets directly to a judgment creditor. However, if a holder of cryptocurrency assets didn’t use such a third-party storage entity, and simply stored everything independently, this could present a problem for a garnishment order. Although cryptocurrency transactions are all openly displayed on public ledgers, tying an account to a particular holder would be very difficult unless the holder freely disclosed his or her identity. This would make it very easy for someone who self-stored their cryptocurrency assets to avoid detection. If a crypto holder did store assets with an entity such as Coinbase, a court order could be served on this entity, and the entity would be required to comply, just as is the case with banks and other financial institutions.

Domestication Issues for Out-of-State Accounts

Another potential issue arises when a cryptocurrency holder opens up an account in one state, but the judgment creditor is located in another state. As an example, Coinbase is located in California, and so accounts opened with Coinbase will likely be considered California accounts for jurisdictional purposes. This means that a non-California creditor would likely have to domesticate the judgment prior to attempting to collect the funds. If the cryptocurrency holder possesses assets in overseas accounts, then collection will likely be impossible, as U.S. courts won’t be able to issue a garnishment order against a foreign storage entity.

Contact Financial Freedom Advocates for More Information

Bottom line: as personal property, cryptocurrency assets should be subject to garnishment, just as any other type of asset would be. If a cryptocurrency holder has a Coinbase account, then Coinbase should be required to comply with a garnishment order, just as a bank would be required to comply with such an order for one of its customers. In reality, though, this may not always turn out to be achievable given the shadowy nature of cryptocurrency. To learn more, contact Financial Freedom Advocates today by calling 786-668-6688.
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