Crypto & Bankruptcy Trustees: Can of Worms (2025)

Crypto is “a can of worms” for bankruptcy trustees in Australia because digital assets are easy to hide, hard to trace across wallets and exchanges, and legally complex to seize and realise—yet they are still property that vests in the bankrupt estate and must be investigated, secured, and reported. From an Australian accounting practice perspective, the difficulty is not whether crypto is an asset (it generally is), but how to identify it, prove beneficial ownership, preserve private keys, manage volatility, and comply with trustee duties while coordinating with the AFSA framework, Australian tax law, and (where relevant) ATO positions on crypto transactions.

Why is crypto uniquely difficult for bankruptcy trustees in Australia?

Crypto is uniquely difficult because the asset’s control mechanism (private keys) and its transaction architecture (pseudonymous, global, irreversible transfers) do not resemble bank accounts or CHESS holdings.

Key complications trustees repeatedly face include:

• Asset discovery risk: Wallets may be unknown, exchanges may be offshore, and records may be fragmented across apps, devices, and email accounts.
• Control and custody risk: Without the seed phrase/private key, “ownership” may be practically unenforceable even if legally established.
• Volatility risk: Material price movements can occur between identification, securing, and liquidation, raising scrutiny about timing and process.
• Commingling and attribution risk: Personal and business wallets may be mixed, and transfers between wallets can obscure beneficial ownership.
• Fraud and clawback complexity: Rapid transfers to associates, mixers, bridging, and DeFi protocols complicate recovery actions.
• Tax characterisation complexity: Disposals, swaps, staking rewards, airdrops and forks can create different tax consequences, and poor records increase risk.

From a practice standpoint, this is where trustees require accounting-grade chain-of-custody records, forensic workflow, and careful contemporaneous documentation.

What does Australian law say about crypto in bankruptcy?

Crypto is generally treated as “property” and can vest in the bankrupt estate, meaning it is within a trustee’s scope to identify, secure, and realise.

In practice, the trustee’s approach should be built around these legal anchors:

• Bankruptcy Act 1966 (Cth): Establishes the framework for property vesting in the trustee and the trustee’s investigatory and recovery functions (including examination and recovery of property and void transactions).
• AFSA (Australian Financial Security Authority) regulatory guidance: Trustees are expected to undertake reasonable enquiries into assets and maintain proper records and realisations consistent with professional standards and AFSA expectations.
• Evidence and process: Even when an asset is legally “property”, enforcement turns on evidence of control, beneficial ownership, and transaction history.

Practical implication: trustees must treat crypto investigations as standard where there are indicators (exchange app use, bank transfers to exchanges, “unknown” merchant names, device artefacts), rather than as an exception.

What does the ATO say about crypto-asset transactions (and why does it matter in bankruptcy)?

ATO guidance is central because bankruptcy administration frequently intersects with tax: prior-year returns, amended assessments, GST (where relevant), and record-keeping expectations.

The ATO’s published guidance (including its cryptocurrency/crypto-asset webpages) consistently emphasises:

• Record-keeping: Taxpayers must keep records of transactions, including dates, values in AUD, what the transaction was for, and counterparty details where available.
• CGT treatment (commonly): Disposals of crypto (including swapping one crypto for another) are often CGT events, subject to context and whether the asset is held on revenue account.
• Income treatment (in some cases): Where activities amount to a business or profit-making scheme, gains may be ordinary income rather than capital.
• Events beyond “cash out”: Using crypto to buy goods/services, swapping, gifting, and certain DeFi/staking mechanics may have tax consequences.

Why this matters for trustees and accounting advisers:

• If a bankrupt has traded heavily and records are poor, reconstructing activity is often required for both asset recovery and tax compliance.
• The estate’s realisation process may trigger disposals requiring defensible AUD valuations at specific times.
• Trustees need coherent documentation to withstand later queries about timing, valuation method, and transaction classification.

Disclaimer-worthy note: tax outcomes depend on facts (capital vs revenue, residency, purpose, business indicators). ATO guidance should be applied carefully and, where necessary, specialist advice should be obtained.

How do trustees actually find crypto assets?

Crypto asset discovery is usually an “indirect evidence” exercise first, followed by technical confirmation.

Typical discovery pathways include:

• Bank statement analytics (high-yield):
• Device and app indicators:
• Email and cloud storage searches:
• Third-party enquiries:
• Public blockchain review (once an address is known):

Practical example (common in practice): A trustee sees repeating $2,000 payments to a fintech merchant. On enquiry, it is an on-ramp provider. That single lead can expand to multiple exchange accounts, then to wallet withdrawals, then to DeFi positions.

What is the biggest operational “worm”: private keys and control?

The biggest operational risk is that crypto is controlled by whoever has the private key/seed phrase, and transfers are irreversible.

Trustees therefore need a rapid and documented “secure-first” approach:

• Immediate preservation:
• Access capture (where lawful and available):
• Estate custody protocols:

Real-world scenario: A bankrupt claims they “forgot” the seed phrase. The trustee identifies a prior email containing a wallet backup hint and finds the seed phrase stored in cloud notes. Without rapid device preservation, this evidence is often lost.

How should crypto be valued for bankruptcy realisation and reporting?

Crypto valuation should be defensible, repeatable, and documented in AUD at relevant dates, because disputes commonly arise about timing and price selection.

Good practice includes:

• Valuation points to document:
• Valuation sources:
• Volatility controls:

The trustee’s file should read like an audit file: price source, timestamp, conversion method to AUD, and evidence retained.

What happens when crypto has been moved to DeFi, staking, or NFTs?

DeFi and staking expand complexity because the “asset” may be a smart-contract claim rather than a simple token balance, and access may require multiple signatures, hardware wallets, or protocol interactions.

Key practical issues:

• Staking and yield: Rewards may be income-like; access may be locked or subject to unbonding periods.
• Liquidity constraints: Some tokens cannot be readily liquidated without slippage or protocol risk.
• Smart contract risk: Rug-pulls, exploits, or governance changes can impair value.
• NFTs: Valuation is particularly subjective; market depth may be thin.

Trustees should document:

• Protocol name, wallet address, and transaction hashes
• Whether withdrawals are time-locked
• The strategy for realisation (immediate vs managed) and why

Are trustees exposed to personal liability when dealing with crypto?

Trustees can be exposed to criticism or claims if they fail to take reasonable steps to secure, preserve, and realise crypto assets, especially where loss occurs through delay, poor custody, or inadequate documentation.

Risk management measures that are expected in a professional environment include:

• Prompt action: Time is critical when assets can be moved instantly.
• Security governance: Controlled access, segregated duties, incident response planning.
• Clear audit trail: Demonstrate that actions taken were reasonable and in creditors’ interests.
• Specialist assistance: Engaging crypto forensics/custody expertise where required.

From an accounting practice perspective, this is analogous to safeguarding physical cash—except the “safe” is a string of words that can be copied in seconds.

How do accountants support trustees with crypto investigations and reporting?

Accountants add the most value when they translate messy crypto activity into coherent, evidentiary schedules that trustees can rely on.

High-value deliverables include:

• Funds-flow schedules:
• Transaction reconstruction:
• Exception reporting:
• Documentation packs:

This is where modern automation matters: manual spreadsheet work is slow, error-prone, and hard to evidence.

How does crypto administration compare to “normal” insolvency asset work?

Crypto administration is more complex than conventional assets because verification and control rely on technical proofs rather than central registries.

Key comparisons (bullet format, no tables):

• Ownership evidence:
• Recoverability:
• Transaction reversibility:
• Valuation:

What are the most common “gotchas” in Australian practice?

The most common gotchas are predictable and preventable when checklists are used.

Common failure points:

• Not asking the right intake questions: “Do you hold crypto?” is insufficient; trustees must ask about exchanges, wallets, devices, DeFi, staking, NFTs, and cold storage.
• Ignoring small bank transfers: Many clients DCA (small regular buys). These are often the strongest indicator of ongoing holdings.
• Delays in securing devices/2FA: Delay creates a window for dissipation or evidence destruction.
• Poor valuation records: Without timestamped AUD valuation evidence, decisions are hard to defend.
• Over-reliance on the bankrupt’s narrative: Independent verification is essential.

Next Steps: How Fedix can help trustees and accountants handle crypto complexity

Fedix supports Australian accounting teams by reducing manual reconciliation and improving evidentiary workpapers—critical when crypto activity intersects with large volumes of bank transactions and fragmented records.

How MyLedger (by Fedix) can assist in crypto-related insolvency workflows:

• Automated bank reconciliation: MyLedger’s AutoRecon reduces reconciliation time from 3–4 hours to 10–15 minutes per client (around 90% faster), helping teams quickly identify exchange on-ramps and unusual transfers.
• Transaction categorisation at scale: AI-powered categorisation can auto-code patterns (for example, repeated exchange payments), reducing review effort and improving consistency.
• Audit-friendly workflow: A spreadsheet-like interface, bulk operations, and snapshots support defensible review and change control—valuable when trustees need to explain how conclusions were reached.
• ATO-context readiness: Built for Australian compliance workflows (GST/BAS/working papers), which supports broader insolvency reporting environments where tax data and bank evidence must align.

If your practice supports trustees, consider piloting MyLedger for faster identification of exchange flows and cleaner working papers, particularly where transaction volumes are high and timelines are tight.

Conclusion

Crypto is a “can of worms” for bankruptcy trustees because it combines high concealment risk, technical control barriers (private keys), rapid dissipation, and complex valuation/tax documentation requirements. Australian accounting practices that support trustees should implement crypto-specific discovery checklists, rapid evidence preservation, disciplined valuation documentation, and transaction reconstruction processes that align with ATO expectations for records and with Bankruptcy Act duties for asset realisation and reporting.

Frequently Asked Questions

Q: Is cryptocurrency considered property in Australian bankruptcy?

Q: What ATO guidance is most relevant when reconstructing crypto transactions?

Q: What are the main red flags that a bankrupt may hold crypto?

Q: Can a trustee recover crypto that was transferred before bankruptcy?

Q: How should an accounting firm document crypto-related findings for a trustee?

Disclaimer: This article is general information for Australian accounting and insolvency professionals as of December 2025. Insolvency and tax outcomes depend on specific facts and can change with legislation, ATO guidance, and case law. Formal advice should be obtained for particular matters, including legal advice for recovery actions and specialist tax advice for characterisation and reporting.