Cryptocurrency and Divorce: Basics of Bitcoin and Crypto in a Divorce

Cryptocurrency, particularly Bitcoin, can make a divorce complicated. It is becoming increasingly common for divorcing couples to own cryptocurrency (aka “crypto”) such as Bitcoin or Ethereum. Most times, one spouse may be unaware of the value of the other spouse’s crypto accounts and/or completely unfamiliar with crypto altogether. If you find yourself in a similar situation, don’t panic. The internet is full of alarming articles about hiding assets using crypto, yet, in the vast majority of instances, this is not the case. While there are cases where spouses hide bitcoin, ethereum, or other cryptocurrencies, it is not typical — at least not yet.

Most people use mainstream platforms to invest in cryptocurrency, just like they would invest in a stock. These platforms provide a digital trail to follow. In rare cases, you may need an expert to perform a more detailed analysis. Either way, the crypto can (almost) always be found. Look on the bright side: many cryptocurrencies have skyrocketed in value over the past ten years, so there is a chance that you will benefit from your spouse’s risky investment.

What is Cryptocurrency?

Although cryptocurrency was originally created as a means for people to anonymously exchange money over the internet, often for illegal purposes, it has recently become much more mainstream. Nowadays, most people invest in crypto just like they would any other speculative holding, hoping the price will rise in the future.

Crypto is essentially a medium of exchange that is digital, encrypted, and decentralized. Unlike the U.S. Dollar or the Euro, there is no central authority that manages and maintains the value of a crypto. Instead, these tasks are broadly distributed among all crypto users via the internet.

Crypto is traded on a blockchain system, which is essentially a public ledger of all transactions across a peer-to-peer network. The public ledger is used as a record-keeping system that maintains participants’ identities in secure and (pseudo-)anonymous form, their respective cryptocurrency balances, and a record book of all the genuine transactions executed between network participants.

Cryptocurrencies are not based on an actual physical asset, so they have no intrinsic value. Instead, the value is determined by supply and demand. In some scenarios, crypto can be used to buy regular goods and services, but it is not a form of payment that has gone mainstream quite yet.

You may or may not be familiar with popular versions of cryptocurrency, such as Bitcoin, Ethereum, or Dogecoin, but there are over 5,000 different cryptocurrencies in circulation today.

If you are still confused about cryptocurrency, that is perfectly normal. Most people who invest in crypto don’t fully understand how the technology works either.

How is cryptocurrency treated in divorce in Colorado?

The good news is that Colorado courts treat crypto just like any other investment asset in divorce. No matter which spouse invested in the crypto, if it was acquired during the marriage, it will be considered marital property subject to equitable division between the spouses. If the crypto was not acquired during the marriage, then it will be considered separate property, however, the increase in the value of the crypto during the course of the marriage is marital property.

How is cryptocurrency valued in divorce?

The value of cryptocurrency is extremely volatile – a cryptocurrency’s price may rise or fall 30% or more in a single day. Recently, for example, TerraUSD and Luna coins lost roughly 90-100% of their value in a single week. Cryptocurrency is volatile because it is not intrinsically valuable. In most instances, there is no gold, company, or government to back the value of a cryptocurrency. Thus, crypto’s market value is based entirely on speculation, which is essentially educated guesswork.

Due to the extreme highs and lows of crypto, a crypto portfolio’s value may be dramatically different when the divorce is filed, compared to when the judge signs the divorce decree. This poses a challenge if one spouse is allocated the crypto portfolio in exchange for other assets, because the value can only be accurately determined on the day that the divorce is finalized (or settled).

Sometimes, it is a better option for the spouses to avoid valuation and choose to divide the cryptocurrency portfolio itself. With this method, an equal distribution of the cryptocurrency can be achieved.

If you end up owning cryptocurrency assets after a divorce, you may want to speak to a financial advisor to decide whether holding the assets is the right thing for you, or if you would rather liquidate and invest in something more stable.

How does the IRS treat cryptocurrency?

In 2014, the IRS issued a notice declaring that, for federal tax purposes, virtual currency is treated as property. Generally, just like stocks, bonds, and other investment property, cryptocurrency realizes ordinary gain or loss and must be declared when filing taxes.

This designation may be helpful in divorce situations because spouses are required to report their cryptocurrency gains or losses on their tax returns. This may make it easier to ascertain the value of the cryptocurrency.

For more information on the tax consequences of cryptocurrency, see “Internal Revenue Bulletin: 2014-16.” Internal Revenue Service, 14 Apr. 2014 — https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21.

How are cryptocurrency assets discovered in a divorce?

How crypto is approached in divorce varies from case to case, however, usually crypto assets are disclosed during the discovery process. Discovery is the process by which one party requests information and documents from the other party. Colorado law places a high value on full and honest disclosure in family law cases. Divorcing couples are required to exchange information about all assets and debts, including investment accounts, credit card statements, retirement savings, and cryptocurrency.

If cryptocurrency information is not provided in discovery, a review of your spouse’s bank statements or credit card accounts may contain indications of the existence of cryptocurrency holdings. For example, if your spouse transferred money to a crypto wallet, such as Binance or Coinbase, this may indicate he or she is investing in cryptocurrency. If this is the case, additional discovery requests or subpoenas may be used to acquire the cryptocurrency records.

At what point should I be concerned that my spouse is hiding assets using cryptocurrency?

You may have heard that cryptocurrency is a perfect way to hide money in a divorce. While there is a small amount of truth to this, it happens less likely than you may think. Spouses usually do not knowingly and willfully engage in significant financial deception during divorce proceedings because of the fear of legal repercussions. Moreover, while there is no dependable data on how often a divorcing spouse hides cryptocurrency assets, it is safe to assume that it is rare because hiding cryptocurrency is a lot harder than it sounds.

Most people that invest in crypto are simply novice speculators looking to make money on a new form of currency. In this instance, crypto investments will most likely be held on a mainstream crypto exchange and investing platform (aka a wallet). These platforms provide statements for transfers in and out of the platform. The statements may be hard to interpret, however, with the help of a knowledgeable person, it can be done. Additionally, the statements can be compared to bank and credit card statements to determine if a large amount of cash have gone missing. Once it is determined that undisclosed cryptocurrency exists, an experienced family law attorney should be able to attain the statements.

There is a small percentage of cases, a tech savvy spouse may be able to better conceal cryptocurrency than the average investor. A spouse  may opt to cut out the middleman and hold their crypto on personally owned hardware wallets. Cryptocurrency can be stored on “hot” or “cold” wallets or some combination of the two. A hot wallet is connected to the internet and allows owners relatively easy access to their coins so that they can access and spend their crypto if they choose to. These wallets are easier to find.

Cold wallets refer to crypto that has been moved to wallets whose private keys – the passwords that enable the crypto to be moved out of the wallet – are not stored on internet-connected computers. Determining the existence or value of a cold wallet is much more difficult and could be used to hide assets in a divorce. If you suspect your spouse has cryptocurrencies stored on hot or cold wallets, you may want to engage an attorney that is experienced in cryptocurrency.

Conclusion

In most cases, Cryptocurrency will be disclosed in the discovery process and the value will be divided between the parties. For the small percentage of cases where a spouse’s cryptocurrency assets are purposefully being hidden, you may need an experienced attorney or cryptocurrency expert to assist you.

 

Anastasia Evans is an Associate Attorney at Griffiths Law PC. Anastasia’s practice is focused exclusively on family law related matters including divorce, parental rights, post-decree disputes, and child support matters.