In many divorce cases, one of the biggest points of contention is the division of marital property and financial assets. When a divorce involves cryptocurrency assets, or if there are suspicions regarding their ownership, it becomes crucial to address the following question: How can you successfully identify, evaluate, and equitably distribute cryptocurrency holdings?
While property and asset division is a typical aspect of divorce, the complexity of dividing cryptocurrency investments when shared by spouses adds an additional layer of difficulty. Digital currencies are difficult to trace, making them an easy oversight in legal battles such as divorce. Spouses underreport their holdings or try to hide funds in online wallets that can be difficult to get into. For those with malicious intent seeking to hide assets, cryptocurrency emerges as an enticing choice due to its inherent intricacies.
Cryptocurrency is a digital currency that functions as a medium of exchange. It uses cryptography to secure and verify transactions as well as to control the creation of new units, of a particular cryptocurrency. It is a solely digital asset that cannot be counterfeited due to high levels of encryption. It is also decentralized, which means there are no banks involved. Cryptocurrency can exist independently of governments and other authorities. It’s important to emphasize that concealing assets, including cryptocurrency, is illegal, but many people try it anyway. While full disclosure of assets is required in a divorce, many take the risk and fail to disclose crypto.
In New York and Massachusetts asset division is defined as equitable distribution. Equitable does not mean equal, and courts are tasked with dividing property in a way that is fair to the parties. Like any other financial asset, cryptocurrency can be considered separate property or marital property depending on when it was acquired and whether it is subject to a valid prenuptial or postnuptial agreement signed by both parties.
In order to determine the division of property, the courts look to the factors enumerated in DRL 236B, which include:
- Marriage length, age & health of each partner;
- Property & income held by each spouse;
- Loss of inheritance or property rights from divorce;
- Loss of health insurance benefits;
- Court-ordered maintenance (alimony or child support);
- Contributions made by each spouse to the other’s separate property;
- Value or liquidity of all marital property;
- Future financial circumstances;
- Assignment of business interests or ownership;
- Tax consequences of property assignation;
- Wasted or expended marital property by either spouse;
- Market value of the marital property at the time of disposition; and
- Custody of minors and the need to use the marital house and its contents.
Cryptocurrency that qualifies as marital property is subject to the equitable distribution laws and is divisible alongside other marital assets such as savings accounts, checking accounts, investment accounts, real estate, art and more.
Popular digital crypto assets include the following:
- Bitcoin (BTC)
- Ethereum (ETH)
- Bitcoin Cash (BCH)
- EOS (EOS)
- Binance Coin (BNB)
- Stellar (XLM)
- Litecoin (LTC)
- Ripple (XRP)
- Cardano (ADA)
- Tether (USDT)
The digital assets are not untraceable. Transactions are recorded on public ledgers called blockchains, which allow Forensic Accountants to follow the money. Some popular forensic tools for blockchain analysis are: Chainalysis Reactor, CipherTrace, and Elliptic. Cryptocurrency owners have the option to store their digital assets in either “hot” or “cold” wallets, or a combination of both. A “hot” wallet remains connected to the internet, providing convenient access for owners to manage and spend their crypto holdings as needed. These wallets are comparatively more accessible and easier to locate.
On the other hand, “cold” wallets involve transferring cryptocurrency to wallets where the private keys, which act as the essential passwords for moving crypto out of the wallet, are stored on devices not connected to the internet. Identifying the presence or assessing the value of assets within a cold wallet presents a significantly greater challenge. This lack of transparency could potentially be exploited to conceal assets during divorce proceedings.
Valuing assets in divorce litigation is not always cut and dry especially when it comes to cryptocurrency. Cryptocurrencies are highly volatile and can experience significant price fluctuations quickly. Determining an accurate and fair valuation is essential to ensure an equitable distribution of marital property. To solve that problem, divorcing spouses can agree that the value of a cryptocurrency will be its value at the time of distribution.
Cryptocurrency transactions are subject to capital gains tax. This means that if you sell or exchange cryptocurrencies for a profit, you may be required to report and pay tax on the capital gain. The tax rate may vary depending on how long you held the cryptocurrency (short-term vs. long-term) and your overall income level. Transferring cryptocurrencies as gifts or as part of an inheritance may also have tax consequences. In some cases, the recipient may need to pay gift or inheritance tax based on the cryptocurrency’s fair market value at the time of transfer. It is imperative for the involved parties to carefully evaluate the tax implications to ensure equitable asset division. Given that not all assets are equally subject to taxation, it is crucial to ensure a fair comparison and division of assets.
Some documents that matrimonial attorneys should include in their discovery demands and subpoena are listed below:
Discovery Requests for Cryptocurrency
- Bank/Credit Card Statements;
- Tax Returns;
- Forms 1099-K issued by cryptocurrency exchanges;
- Email correspondence, chat logs, or messages discussing cryptocurrency transactions or related matters. Social media records that may contain relevant information;
- A list of digital assets held, received, accepted, used, purchased or sold as of a certain date;
- All Master Public Key(s) and/ or Extended Master Public Key(s) (a/k/a Xpub, Ypub, Zpub) for any cryptocurrency wallet(s) owned, and
- Computer hardware and software devices used (or previously used) in connection with digital assets.
While dividing crypto assets can present unique challenges due to their volatility and complex nature, an experienced Forensic Accountant can help ensure that you receive a fair share of these digital assets. The experts at FAZ understand the intricacies of divorce cases involving hidden assets, including cryptocurrencies. We assist attorneys not only identify assets and liabilities but provide a roadmap for the valuation. We provide facts supporting the classification for marital, non-marital, or separate assets, and assist the Court to an ultimate appropriate resolution.