Bitcoin, Ethereum and XRP are more than just financial buzzwords. These forms of cryptocurrency have become part of everyday vocabulary. Although it’s difficult to definitively say how many American adults own cryptocurrency, one source estimates it could be as high as 28%. Yet, these items have already become a point of contention in divorces. Until banks and governments take actions that “normalize” ownership of these assets, these issues will not only continue but likely increase.
The reason why cryptocurrency is often problematic in divorce cases is rooted in its private, and at times, untraceable nature. This is further compounded by risks associated with holding and transferring digital assets. If you or your soon-to-be ex-spouse have cryptocurrency, below are some safeguards and issues to consider when allocating the asset.
Why Cryptocurrency Can Be Hard to Trace
Nearly every case I have handled involving cryptocurrency has something in common: allegations that one party is hiding cryptocurrency. Unlike traditional financial accounts that go through a central institution and can be tracked with institution statements, tax returns, etc., cryptocurrency is often more difficult to discover because the assets can be stored “off-grid” or in a “cold wallet,” such as a computer or phone disconnected from the internet or a flash drive.
There are clues, however, that can help someone discover cryptocurrency in a cold wallet, but these indicators have limitations. For instance, bank account records can show a cryptocurrency purchase; however, banks and other financial institutions are typically required to maintain records for only seven years. Moreover, crypto would only show up on a tax return if the owner has sold it since capital gains or losses are only triggered by the sale. That is why it is crucial to select a divorce attorney who has knowledge and experience in cryptocurrency and a network of forensic accountants and other specialists. It’s important to note, though, that while attorneys can subpoena third parties such as crypto platforms, obtaining complete information from them can be challenging.
Dividing “Digital Dollars”
I typically divide crypto assets in a dissolution matter by a percentage instead of a set dollar amount due to the significant fluctuation in cryptocurrency markets. This ensures the parties both share equally in any increase and decrease in market changes before the actual division. It also protects clients who own and are dividing lesser known/owned cryptocurrencies which is a much higher risk investment – in the event the value of the cryptocurrency price diminishes to nothing.
Much like a retirement account and other assets, cryptocurrency that is acquired prior to marriage would be considered non-marital property including the increased value of the same. For example, if someone purchased $10,000 worth of cryptocurrency before the marriage and now it’s worth $5 million, those funds would not be part of the allocated marital estate. However, the court may still take these funds into account when deciding how to divide shared assets, since having significant non-marital wealth can impact the overall decision.
Risks of Transferring Crypto
I always advise clients to be cautious and work with a professional who can facilitate cryptocurrency transfers when digital assets are divided. Often the concern with transferring is that the former spouse will purposefully cause problems during the transfer. However, third-party interception is also a significant concern and threat. The safest way to transfer cryptocurrency is via a direct transfer from a “hot wallet” account or a QR code from a trusted source which minimizes risks such as typing mistakes, phishing attacks and interceptions by malicious third parties.
Safeguarding Yourself
Knowledge is power when it comes to cryptocurrency. Understand, to the best of your ability, what digital assets are part of the marriage and where they are located.
Additionally, work with a knowledgeable and experienced attorney who recognizes their limitations. Although I have significant experience in discovering and transferring cryptocurrency, I secure the assistance of other experts as needed to properly protect the interests of my clients. With the right team, you will be effectively guided through the challenges of discovering and allocating cryptocurrency.