Divorce and Cryptocurrency: Key Considerations for Asset Division

Cryptocurrency in Divorce: A New Frontier in Property Division

Cryptocurrency has evolved from a unique investment class into a mainstream financial asset that is often found as part of a divorce. Digital currencies like Bitcoin and Ethereum, among others, are being classified and characterized as significant portions of marital estates in Massachusetts and throughout the United States. This evolution is unlike anything before it and introduces possible new challenges for family law practitioners and divorcing couples in locating and identifying these digital assets.

Cryptocurrency, in comparison to traditional financial instruments, exists only digitally on a peer-to-peer network and has no governing authority controlling its operation. Digital assets exist and are created using blockchain technology- a distributed digital ledger maintained and passed down among nodes, and contains transaction history of digital assets with a level of accuracy and transparency that exceeds any other traditional method of recording value transmission. It is the decentralized aspect, but also the lack of a third-party or central locus of value transmission, that fundamentally sets cryptocurrency apart from other financial assets like bank accounts, stocks, or real estate.

The volatility of cryptocurrency markets adds further complications in divorce settlements. The value of a (presumably) digital currency can change rapidly based on market sentiment, regulatory news, new technology developments, and, in fact, sometimes can increase and decrease by double digits in a day or two. Such volatility provides a unique challenge in assessing fair value during divorce property division proceedings.

As cryptocurrency holdings become a more routine feature of marital estates, it becomes important to similar operations of cryptocurrency and its financial effects on equitable division under divorce law.

Crypto and Divorce: Key Legal Challenges Explained 

• Tracking the Untraceable

One of the biggest obstacles in divorce cases associated with cryptocurrency is just looking for it. Unlike traditional financial institutions, cryptocurrency works on decentralized networks without a central record-keeping authority. No monthly details are coming in the mail, and there is no easily accessible account history to review. Cryptocurrency holdings exist in digital wallets, which are accessed only through private cryptographic keys, which are complex passwords known to the owner. When a spouse is not moving forward about their crypto assets, lawyers should resort to indirect methods of search, such as:

• Identification of transfers from bank accounts to cryptocurrency exchanges

• Credit card statement checks for exchange-related purchases

• Reviewing tax returns for reported crypto transactions

• Analysis of computer browsing history for trading platforms trips

The pseudonymity of blockchain technology further complicates the design matters. While all transactions are recorded on the public account book, specific wallets require special forensic expertise to connect individuals that many divorce professionals do not have.

• The Valuation Rollercoaster

Another major consideration of cryptocurrency’s incredibly volatile price movements. For example, just look at Bitcoin price history – a coin might be valued $30,000 at the time of the initial divorce filings and be valued at $60,000 by the time the settlement discussions have started, or vice versa.

This volatility creates difficult decisions on the timing of the valuation:

• Should we value at separation?

• At the time of trial?

• Use an average over a period?

These situations give one spouse a distinct advantage or disadvantage based on upward or downward movements in the market insights. Some courts have begun to address this issue with cryptocurrency by simply separating the actual units of cryptocurrency, rather than determining the dollar amount of the asset, but this creates its own problems.

• Technical hurdles and practical quandaries

Extra technicality prevails in cryptocurrencies, rendering the division process just a tad more complicated.

• Transferring crypto requires skills of a technical nature and great precision.

• Even a slight error entered within the wallet address will assuredly stick a knife forever into a fund transfer.

• It is impossible to confirm “lost” keys or “lost” wallets.

• Newer forms of digital assets like NFTs cannot be divided but require special handling.

Often, they collide, making it extremely difficult to locate hidden assets with volatile values, value them properly, and divide them properly.

In cases of divorce with cryptocurrency holdings, it has become progressively necessary to work with professionals who understand the nature of these digital assets. Most often, forensic accounting, particularly when teamed with technical expertise and creative settlement approaches that consider the unique forensic characteristics of such digital assets, will produce the best results.

Discovery in Crypto Divorce Cases

• Making a Discovery of Crypto Assets in Divorce Proceedings

In divorce matters, discovering some form of cryptocurrency holdings just brings in peculiar challenges from the mandated legal and technical knowledge. Unlike traditional assets, which at least may leave some paper trails, digital currency needs some other special discovery techniques.

• Requirements Related to Mandatory Financial Disclosure

According to Massachusetts Supplemental Probate and Family Court Rule 410, the parties to a divorce action shall within 45 days from service of the complaint, or motion for divorce obtainment, exchange between themselves certain financial documents so disclosed from each party’s initial financial disclosure normally consist of traditional financial records which may indicate activity in cryptocurrencies such as bank statements showing transfer of funds to digital currency exchanges.

• Important Tax Documentation

Tax returns are becoming increasingly important for potential cryptocurrency discovery, such as:

• The tax return Form 1040 now explicitly has a question asking whether the taxpayer has transacted in virtual currency.

• Capital gains or losses on Schedule D and Form 8949 may arise from the sale of cryptocurrencies.

• Forms 1099 from exchanges like Coinbase-1099-MISC for rewards of $600 or more.

These documents can be examined closely to look for inconsistencies that may be considered evidence of undisclosed crypto.

• Bank and Investment Account Analysis

Since cryptocurrencies are decentralized networks, most investors normally acquire crypto using dollars, which usually calls for a banking or conventional financial institution relationship. A comprehensive review of a bank and investment account statement generally discloses information such as:

• Transfers to the platform or exchange type Coinbase.

• Withdrawals from the exchange to a traditional bank.

• Repeated activity suggestive of investment or trading.

• Formal Discovery Using Subpoenas

During discovery, locating personally held wallets not commonly held at an exchange can sometimes be challenging. Most crypto users do keep accounts at legal exchanges, and those exchanges must respond to legal requests, which include:

• Subpoenas to platforms such as Coinbase, Binance, or Gemini will tend to yield detailed account information and transaction records.

• Subpoenas might have to be sent to various exchanges if assets have been shuffled around between exchanges.

• If the exchange is foreign or unregulated, this would raise issues of jurisdiction.

• Utilize your expert resources

The technical complexity of cryptocurrency usually leads to a need for specialized help:

• Forensic accountants can track financial transactions and the digital footprints that they leave on the blockchain.

• Cryptocurrency experts will have the technical knowledge in matters of wallet structure and transaction methods.

• These experts may assist you in ensuring appropriate discovery and valuation of assets.

Appropriate discovery of cryptocurrency typically involves a mixture of traditional legal methodology (financial affidavits, interrogatories, or document requests) and specialized technical investigation. In this way, you can be sure that all digital crypto assets have been appropriately identified and valued to arrive at a fair distribution.

Recommended Practices for Addressing Cryptocurrency in Divorce 

Proper allocation of cryptocurrency in divorce will require strategic planning and expert knowledge. As cryptocurrencies become more commonplace among marital estates, attorneys and divorcing spouses must adapt their usual traditions to meet emerging challenges.

• Recommended Practices to Achieve a Fair Resolution

Transparency is the basis for good management of cryptocurrency distributions in divorce. Both parties must convey their overall financial disclosure and financial representations, complete with all digital assets. Typically, this would require parties to disclose their cryptocurrency holdings on differing exchanges and all wallets where cryptocurrencies are stored – this could require a comprehensive “sweeping” of elder statements and disclosures.

Litigation assistance in these cases has become almost mandatory, with significant cryptocurrency holdings. cases have included:

• Forensic accountants to trace transactions and identify hidden holdings

• Cryptocurrency specialists to provide accurate valuations of holdings despite the price volatility that can exist

• Tax professionals to analyse and provide legal advice on the possible tax ramifications of division strategies.

• Asset Preservation Requirements

Courts regard cryptocurrency the same as any other marital asset that is subject to preservation requirements. In Massachusetts, there is an automatic order for financial restraint that comes into effect when someone files for divorce. These presumptions explicitly include:

• Moving or transferring cryptocurrency into a wallet that cannot be accessed

• Concealing digital assets by using privacy coins or mixing services

• Dissipating the value of crypto by participating in high-risk trading or staking

A failure to properly disclose cryptocurrency holdings to the court, or an attempt to conceal or misrepresent cryptocurrency holdings, could lead to consequences, including the possibility of sanctions, the loss of the digital asset, or a possible adverse property division.

Contemporary Assets Guided by Classic Principles

Even though cryptocurrency is modern technology, the legal principles for its treatment in divorce are logically consistent with traditional forms of assets. Courts are still focused on:

• Equitable distribution through full disclosure.

• Not destroying value from a marital estate.

• Fair distribution based upon acquisition timing and contributions.

To successfully navigate cryptocurrency in divorce, attorneys must create a balance between traditional legal diligence with technical understanding of these new digital assets. As with any technology, there is always a chance that technological advances can compromise fairness, which is what divorce cases can provide.

Dividing Crypto in Divorce: What You Need to Consider

Also, in partnership with the tax implications and the pecuniary interests of each party, there are various methods by which cryptocurrencies can be divided between parties under a divorce decree. The inherently speculative nature of cryptocurrency means that the options available to the parties for dividing the cryptocurrencies range in a peculiar set of considerations that warrant special consideration in arriving at an acceptable resolution for each party. The potential and viable alternatives for the division of cryptocurrency assets could include the following:

Methods for Division of Cryptocurrency Assets

Depending on their circumstance, some parties may be interested in converting their crypto to higher-aged assets immediately, while others would rather keep their crypto positions. The methods of substance are as follows:

• Division by way of direct transfer: The spouses simply transfer specified amounts of cryptocurrency from one wallet to the other.

• Division by liquidation and distribution of proceeds: The spouses convert the crypto into cash before they divide and distribute the proceeds.

• Division by way of an in-kind and pro-rata basis: The spouses divide every kind of cryptocurrency according to the division percentage as agreed.

• Division by asset offsetting: One taxpayer may retain his/her cryptocurrency or crypto position, while the other receives assets of equal nature and value to that cryptocurrency.

• Liquidation by tranches or by stages: In the event of each retaining a specified kind of crypto, the spouses may similarly ease some market-timing anxieties by liquidating that crypto to cash at some stage down the road over some weeks or months.

Each of the ways may entail different and possibly unique tax effects or practical considerations that may need to be weighed, considering the parties’ particular circumstances and preferences.