Dividing Cryptocurrency in Divorce
Digital currencies are growing in popularity and it is quite common for many divorcing parties to own one or more cryptocurrencies on more than one exchange.
Just like any other asset that is considered marital or community, cryptocurrency is treated as a form of property subject to division in the same way as other financial assets such as real estate, brokerage accounts, retirement accounts and bank accounts.
Yet, one of most concerns that differentiates digital assets from other assets is that it is difficult to discover any cryptocurrency that is not disclosed as part of the preliminary disclosures and ongoing informal or formal discovery during the divorce process. Unlike physical assets or traditional bank investment accounts, cryptocurrency transactions are often recorded anonymously on the blockchain and it is not a commonly utilized asset between spouses.
The decentralized structure of cryptocurrencies means they lack a central authority that maintains records, unlike traditional banks. Unlike a bank account, crypto holdings do not produce regular account statements or easy paper trails. Many cryptocurrencies are held in digital wallets identified only by cryptographic keys, which are often known only to the owner.
This fosters the possibility of hidden cryptocurrency. The inherent opacity requires specialized techniques and expertise to trace and identify cryptocurrency assets. Experts, such as blockchain investigators can help trace transactions and may be needed to track the transfers.
Uncovering digital assets may involved tracking credit card purchases or any transfers to or from crypto exchanges.
Tax documents now require that taxpayers to disclose crypto trades both on the front of the 1040 and on Schedule D and Form 8949 (capital gains from cryptocurrency sales). Analyzing these forms can help identify potential discrepancies or inconsistencies in any financial disclosures, potentially indicating undisclosed cryptocurrency holdings.
Other sources for identifying cryptocurrency holdings are bank and investment account statements that could be traced for deposits and exchanges out. Although crypto itself may be secretive, most investors fund their crypto accounts from fairly conventional sources like bank and investment accounts.
Many crypto investors use exchanges such as Coinbase to buy or hold crypto. These companies maintain customer records and will respond to subpoenas or court orders in most cases. An attorney can subpoena account information and transaction histories from such exchanges. Notably, there may be a need for multiple subpoenas if there are several exchanges or assets are moved between platforms.
Another key concern is the valuation of the cryptocurrencies. Cryptocurrency prices are notoriously volatile. The process of dividing digital assets requires careful consideration especially since the asset valuation is exchanged 24/7 and the coins can fluctuate widely a daily basis or even hour to hour.
Once the cryptocurrency is valued, like other assets, there are several ways to divide the asset: directly transfer to the other spouse, offset the cryptocurrency with other assets, and sell the cryptocurrency.
However, the risk is that the volatility of the cryptocurrency could dramatically change and cause unequal division of assets once any transfer or offset takes place. Parties and courts must decide on a valuation date, for instance, the date of separation, the date of trial or an agreed-upon date, and stick to it. The speculative nature of cryptocurrency makes its long-term value uncertain, making it challenging to determine a truly equitable division that accounts for potential future gains or losses.
The practicalities of dividing it can also be complex. The intangible and technical nature of crypto complicates the division. Transferring cryptocurrency requires careful technical steps especially with wallet addresses. Overall, typically the most difficult issue to address when dealing with crypto in divorce will be dealing with discovering the assets themselves and then valuing them.
If sold, cryptocurrency is treated as any other investment when traded or sold and taxed as a short or long-term capital gain or loss. Of course, any transfers between spouses is not taxed in accordance with IRS Code 1041.
Cryptocurrency may be a modern innovation, but in the context of divorce, it requires the same, and even an order of magnitude more, diligence, transparency, and legal scrutiny as any other asset.
