With the growth of cryptocurrencies, more divorces will involve this as a type of asset that must be disclosed, accounted for, and distributed in the divorce. The secretive nature of this type of currency creates particular challenges when it comes to divorce because it can be easy to conceal and difficult to trace.
Ownership of Cryptocurrency in Divorce
As with any other kind of asset involved in a divorce, cryptocurrency can be a separate asset or a marital asset. Separate assets are those that are brought into the marriage by a spouse or acquired during the marriage as a gift, inheritance, or personal injury award. Separate assets are not divided by the court in a divorce. Instead, the ownership remains intact. Assets acquired during a marriage are considered marital assets. These assets are divided by the court as part of the divorce.
How marital assets are divided in a divorce is a matter of state law. Some states use an equitable distribution method of division in which assets are divided fairly and equitably, but not necessarily a half and half split. Other states use a community property method of division. In this situation, each spouse is entitled to half of the marital assets.
When Cryptocurrency Must Be Disclosed in a Divorce
When a couple divorces, the court requires that they make a complete financial disclosure to each other and the court. Each person must list their own separate assets as well as all marital assets in their financial affidavit. Because this is an affidavit, accurate information must be given, and the document must fully disclose ALL assets.
Valuation of Cryptocurrency
All assets involved in a divorce must be valued. Particularly with cryptocurrency, the valuation date is crucial. Since this type of asset is so volatile and its value can be incredibly disparate at different points in time, the court pinpoints one particular date and uses the value of the currency on that date to use for the purposes of the divorce. All of the other assets in the divorce are also valued on that specific date.
The valuation date might be the date of separation or the date of the divorce filing, or another date the court finds to be appropriate. With cryptocurrency, the valuation date can be a significant point of contention. For example, Dogecoin was valued at $.07 on April 12, 2021, while on May 7, 2021 it was valued at $.68. If the couple separated on April 12 and filed for divorce on May 7, the asset could be valued at either point in time, with a massive difference in value if there are significant shares.
If the shares are valued at the April value and awarded to Spouse A, but the share value continues to rise, that spouse has significantly more value than if they were simply awarded cash in the amount of the cryptocurrency on that date. Likewise, if Spouse A is awarded the cryptocurrency with the May value and the value goes down, they actually end up with less than if they had been awarded cash.
The other consideration is that the value of the cryptocurrency skews the share of the total assets. If the couple has marital assets valued at $1 million and Spouse A is awarded 50 percent of the marital assets to be made up of all the cryptocurrency plus cash, the date of valuation is critical. If assets are valued on April 12, the cryptocurrency is at a low point and won’t be worth as much, so Spouse A will get more cash than they would if the currency was valued on the May 7 date.
Preservation of Cryptocurrency
A key requirement in a divorce is that all of the couple’s assets must be preserved for the divorce court to distribute them. In many states, when the divorce is filed, the court will issue a preliminary order requiring the spouses to refrain from “wasting” marital assets. This means using the assets up, destroying them, giving them away, or spending them. Additionally, the couple is usually directed not to make any changes in their financial affairs. They should not buy, sell, or transfer any of their holdings while the divorce is pending. This includes cryptocurrencies.
In addition to keeping the cryptocurrency investment intact, you and your spouse must retain all information, wallets, and logins for accessing the currency.
Division of Cryptocurrency
Cryptocurrency that is determined to be a marital asset is divided between the spouses in the divorce judgment or settlement. All of the currency could be awarded to one spouse, or the currency could be divided between the spouses. If you have strong feelings about the currency (perhaps you don’t feel comfortable with it and don’t want to own it, or you absolutely want to be the one who gets ownership), be sure your attorney understands your position and can communicate it to the court.
If you hold the currency and the court orders you to turn over some or all of it to your spouse, you are required to either transfer the currency or provide the blockchain login information to your spouse.
As with any asset, there may be tax consequences. In general, when assets are transferred as part of a divorce judgment or settlement, the recipient spouse takes on the adjusted basis of the transferring spouse. This holds true for cryptocurrency as well. This rule applies whether that basis is higher or lower than the property market’s value at the time of the transfer. Cryptocurrency is subject to capital gains, according to the IRS.
If you are awarded the currency in the divorce, and you sell it after the divorce, you will have to pay tax on the gain if the sale price is higher than your basis. If the sale price is less than your basis, you can take a loss.
Due to the nature of cryptocurrency, it can be easy to conceal, and some spouses might think they can invest in it and not disclose it at the divorce – thus keeping it from being divided in the divorce. If you believe your spouse has purchased it and not disclosed it, or if you are unsure as to whether or not they have, there are several options available to you.
First, consider discussions you have had with your spouse or overheard your spouse participating in. If they have mentioned cryptocurrency, indicated an interest in it, or shared knowledge about it, it is possible they have purchased some, and you should notify your attorney of this.
If you believe your spouse has purchased it and has not disclosed it, there is documentation that you may be able to access, but it is important that you talk to your attorney before doing so. Accessing password-protected accounts, files, or computers could be a violation of privacy laws. Instead of doing your own detective work, your attorney can subpoena the requested information as part of the discovery phase of your trial. They can also retain a forensic accountant or cyber investigator to locate the information.
Information such as the following can provide proof of purchase of digital currency:
- A hard copy wallet with login information
- A large number of Amazon purchases sent to the owner of the currency in lieu of payment so there is no purchase receipt
- An email receipt from a crypto trading company may be sent to your spouse’s email or could be sent to secret email addresses they have created for this purpose
- Downloads of cryptocurrency apps onto their phone or tablet
- Email correspondence about a purchase or potential purchase
- Paypal transactions used to purchase the currency
Cryptocurrency can be a crucial part of a divorce, so it is important to understand its value, location, and your rights to it. If your divorce includes cryptocurrency, it is important to consult with an attorney who can provide you with specific, individual guidance about your unique situation.