Cryptocurrency has become a mainstream topic of conversation and investment in 2024. According to Techopedia, *20% of Americans currently own some form of cryptocurrency**. While Bitcoin and Ethereum constitute the bulk of cryptocurrencies by value, more than* 23,000 different cryptocurrencies are in circulation globally. Because cryptocurrency is a digital asset protected by cryptography, it attracts many who are in search of safety from their creditors. In this article, I will discuss the pros and cons of owning cryptocurrency from an asset protection standpoint.

What Is Cryptocurrency?

Cryptocurrencies operate on decentralized computer networks that use cryptography for security, offering a level of privacy and anonymity that other asset classes do not. Transactions are recorded on a blockchain, a decentralized ledger that ensures the integrity of the data by making it extremely difficult to alter any past entries.

Because the blockchain is protected by cryptography, it is highly resistant to fraud. Provided that a cryptocurrency owner safely stores their private and public keys, their holdings should be secure from theft. However, security hinges heavily on how these keys are managed.

Cryptocurrency IS VolATILE

By definition, cryptocurrency has no intrinsic value. It is merely entries on a digital ledger, so its value is determined by supply and demand. For this reason, cryptocurrency markets tend to experience extreme volatility. For example, Bitcoin has seen tremendous fluctuations in value since its creation in 2009—from as low as a few cents to as high as over $68,000 in 2021. This volatility makes cryptocurrency a risky asset to hold, especially for those using it as a primary investment vehicle.

Cryptocurrency values tend to increase during periods of excess liquidity in the economy and contract during financial downturns. Moreover, most cryptocurrencies rise and fall together due to the speculative nature of the market. This means that investing in cryptocurrency exposes your wealth to a significant risk of value collapse.

Is Cryptocurrency Treated as Currency or Personal Property in Florida?

In the state of Florida, cryptocurrency is generally treated as personal property rather than as legal currency. While it can be used as a medium of exchange, it is not considered legal tender under Florida law or U.S. federal law. For purposes of taxes, estate planning, and legal disputes, cryptocurrency is classified similarly to stocks or other investments—an asset rather than currency. The IRS also treats cryptocurrency as property for federal tax purposes, which influences its handling in legal matters. In the event of a divorce or dispute over asset division, cryptocurrency is likely to be treated as personal property, subject to valuation and division like other investments.

Taxes on Cryptocurrency Appreciation

Like other capital assets, cryptocurrency is subject to capital gains tax on appreciation. When you sell or exchange cryptocurrency for a higher value than you initially paid, you are responsible for reporting the gain and paying taxes on it. The amount of tax due is calculated by subtracting the initial purchase price (your cost basis) from the sale price (the fair market value at the time of sale).

If you hold cryptocurrency for less than a year before selling it, the profit is taxed as short-term capital gains, which are taxed at ordinary income rates. However, if you hold it for more than a year, you qualify for long-term capital gains rates, which are generally lower.

For example, if you buy 1 Bitcoin for $10,000 and later sell it for $15,000, you will owe taxes on the $5,000 gain. Understanding the tax implications of cryptocurrency transactions is crucial, as failure to report gains can result in penalties and interest.

When is Cryptocurrency Exposed to Creditors

Some cryptocurrency transactions are more private than others. Most cryptocurrency sales occur on public exchanges like Coinbase or Binance, which record these transactions in databases that could be accessed by creditors through legal means. In Florida, garnishment laws may allow a judgment creditor to garnish cryptocurrency held on an exchange, although the specific application of these laws to crypto is still developing.

Does a Florida Debtor Have to Disclose Cryptocurrency to Creditors?

In Florida, debtors are required to disclose their assets to creditors during post-judgment discovery. This process allows a judgment creditor to uncover a debtor’s financial accounts and other holdings in order to satisfy a court-awarded judgment. Cryptocurrency, like any other asset, falls under the scope of this discovery.

During post-judgment discovery, a creditor may force a debtor to testify under oath about the nature, value, and location of all their assets. This includes traditional assets like bank accounts and securities, but also extends to cryptocurrency holdings. During questioning, a creditor may directly ask the debtor whether they own cryptocurrency, the value of those holdings, and where the cryptocurrency is stored (e.g., on an exchange or in a private wallet).

If a debtor fails to truthfully disclose their cryptocurrency holdings in the discovery process, they could be held in contempt of court. Florida courts have the authority to enforce discovery orders through the imposition of fines and jail time.

Can a Florida Creditor Garnish Cryptocurrency?

Yes, a Florida creditor can potentially garnish cryptocurrency holdings, but the process can be complicated due to the decentralized and encrypted nature of these assets. To garnish cryptocurrency, a creditor would need to obtain a writ of garnishment from the court that identifies the debtor’s cryptocurrency and the third party that is holding it.

Enforcing Garnishment: The creditor must first identify where the cryptocurrency is held. If the debtor holds an account on a centralized exchange, such as Coinbase or Binance, the creditor can serve the garnishment order to the exchange. The exchange would then be legally required to freeze the assets and turn over the funds to the creditor.

Challenges: If the cryptocurrency is stored in a private wallet or in cold storage (an offline wallet), garnishment becomes much more difficult. The debtor has control over the private keys, and without those keys, the assets are effectively inaccessible. In such cases, the creditor would need to obtain a court order forcing the debtor to provide the creditor the device that contained the wallet along with the access codes. Even if a creditor obtained such an order, there would be obvious challenges in enforcing it.

Strategies for Protecting Cryptocurrency from Florida Creditors

Avoid Centralized Exchanges: Centralized exchanges must comply with U.S. financial regulations, including "Know Your Customer" (KYC) laws, which require identity verification. Instead of purchasing cryptocurrency on centralized exchanges, you can use decentralized platforms such as LocalBitcoins or Paxful to buy crypto directly from individuals or exchange it for cash in person. This reduces the chances of your transaction being traced.
Do Not Store Cryptocurrency on Exchanges: When you store cryptocurrency on an exchange, you are trusting the platform with your private and public keys. This means your assets could be at risk if the exchange experiences a security breach or internal fraud. Additionally, if the exchange receives a writ of garnishment, it may be legally compelled to hand over your assets to creditors. Instead, store your cryptocurrency in a hardware wallet, like a Ledger Nano X, which you control and keep offline.
Use Privacy Coins: Some cryptocurrencies, like Monero (XMR) and Zcash (ZEC), are designed with privacy in mind. They use cryptographic techniques such as ring signatures to obscure the transaction details, making them nearly impossible to trace. Using privacy coins can enhance your anonymity and reduce the risk of creditors tracing your transactions.
Use Offshore Entities: You may consider using an offshore trust or LLC to purchase and hold your cryptocurrency. Offshore jurisdictions like the Cook Islands and Nevis offer strong asset protection, putting your cryptocurrency beyond the reach of U.S. courts in most cases. This strategy can provide an additional layer of protection, but it requires careful planning to comply with tax and reporting obligations.

Pros and Cons of Cryptocurrency for Asset Protection

Pros:

Decentralization: Cryptocurrencies operate on decentralized networks, making them harder to seize than traditional assets held in banks or investment accounts.
Privacy: With proper steps, cryptocurrency transactions can be made with a high level of privacy, especially when using privacy coins or decentralized exchanges.
Portability: Cryptocurrency is easily transferable across borders, offering a fluid and adaptable way to protect wealth.

Cons:

Volatility: Cryptocurrency is highly speculative and prone to extreme price swings, which may erode the value of your holdings rapidly.
Regulatory Uncertainty: Cryptocurrencies face evolving regulations, and future legal changes could affect their ability to be used for asset protection.
Exposure on Centralized Exchanges: If your cryptocurrency is stored on a centralized exchange, it may be vulnerable to garnishment or seizure by creditors.

Conclusion

Cryptocurrency offers some unique advantages as an asset protection tool such as cryptography and partial or complete anonymity. However, these benefits are offset by significant risks. Investors considering cryptocurrency for asset protection should consult with legal and financial advisors to help evaluate the risks and rewards.

Cryptocurrency: Asset Protection Guide