By the end of 2022, it is estimated that 33.7 million individuals in the United States will own at least one form of cryptocurrency, according to insiderinelligence.com.
Despite its increasingly growing popularity, cryptocurrency still has a reputation for being elusive. It is a relatively new frontier for many legal practitioners, including family law attorneys.
Accordingly, if you are anticipating handling a divorce case, it is advisable to garner some basic knowledge about cryptocurrency and its implications in the dissolution process. Specifically, it is essential to educate yourself on the mechanics of locating, valuating and dividing cryptocurrencies.
What is cryptocurrency?
Cryptocurrency is a form of digital money. A unit of cryptocurrency is essentially a number on a database called a blockchain. The blockchain records the transfers of that number from one user to the next.
Cryptocurrency is a relatively new form of commerce. Bitcoin, which was created in 2009, was the first established form of cryptocurrency to emerge on the market. Today, it is estimated there are over 17,000 types of cryptocurrencies in existence. Some of the most popular types of cryptocurrencies include Bitcoin, Ethereum, Tether, Binance Coin, Dogecoin and USD Coin.
One appeal of cryptocurrency for some users is that it’s decentralized. It is not tied to any central authority, such as a government, bank or brokerage firm. This means that cryptocurrency transfers are almost entirely free of international regulation, third-party interference or fees.
Rather than some financial institution regulating the digital transactions, cryptocurrency is verified by a process known as mining.
What is the role of cryptocurrency in your client’s divorce case?
Just as with any other type of asset, cryptocurrency belonging to one or both spouses will have to be accounted for within the division of property segment of the divorce settlement and can be considered separate or marital/community property.
How to learn if your client’s spouse has cryptocurrency?
Review account records: Does your client have access to a joint bank account and/or his or her spouse’s individual bank account records? If so, you may want to start by reviewing the monthly account statements for those accounts for any references to cryptocurrency transactions.
Search cell phones and/or email inboxes: Check cellphones for mobile phone applications, which might show your client’s spouse has cryptocurrency. Some popular cryptocurrency mobile phone apps include: Coinbase, BlockFi, eToro, ZenGo and Gemini. Also, you may want to try reviewing a spouse’s inbox for confirmation emails signaling a cryptocurrency exchange or transfer activity. Note: If your client does not have permission and/or passwords necessary to access his or her spouse’s cell phone, computer or other electronic devices, it is advisable to get court approval prior to investigating the email and/or cryptocurrency apps.
Retain an expert’s assistance: If financially feasible for your client, you may want to\ consider hiring a forensic expert on his or her behalf. A digital forensic expert should be able to complete an in-depth search of the spouse’s electronic devices for other evidence of cryptocurrency usage including public addresses, private keys and cryptocurrency wallets.
Check tax returns: For federal tax purposes, cryptocurrency is considered to be “property” by the IRS. If your client’s spouse has sold or spent cryptocurrency, he or she should have reported the transaction as capital gains and losses on Schedule D of the individual’s Form 1040. Alternatively, one may be paid in cryptocurrency. If the individual is paid in cryptocurrency by an employer, he or she should receive a W-2 reflecting said payments. On the other hand, an independent contractor paid in cryptocurrency for performance of services should receive a 1099 Form reflecting those payments.
Send subpoenas: Another option for uncovering some information regarding a spouse’s cryptocurrency may be to subpoena account records for cryptocurrency exchanges based in the United States (such as Coinbase, Gemini, etc.). Meanwhile, foreign exchanges may be difficult to subpoena as they are based outside of the United States and are not under the same obligation to provide information.
Take depositions: While deposing your client’s spouse, you may want to ask questions aimed at revealing if he or she has any cryptocurrency and important information associated therewith, such as “What is your wallet address and private key?” Additionally, you may also consider deposing the spouse’s employer, business partner or any other third parties who could have paid or exchanged cryptocurrency.
How to Divide & Value Cryptocurrency?
Once cryptocurrency has been identified, it needs to be valued. This task can be tricky as the value of cryptocurrency is extremely volatile. In fact, it may rise or drop significantly in a single day. One option for valuing the cryptocurrency is to agree to a date the asset will be valued, such as the date of the entry of final divorce decree or date the settlement agreement was signed.
In general, cryptocurrency obtained by one or both spouses during the course of their marriage will likely be considered marital/community property. However, if one spouse owned cryptocurrency prior to the marriage or received it during the marriage through inheritance or gift, it will probably be considered separate property.
If the cryptocurrency is determined to marital property, there are several options for dealing with it in the division of the parties’ property. Sometimes, one spouse will agree to take the cryptocurrency while the other party will take another asset or assets equivalent in value. Other times, the cryptocurrency is transferred from one spouse to the other.
This may be completed by simply transferring the cryptocurrency from one spouse’s digital wallet to the other’s digital wallet. Alternatively, if one spouse does not have a cryptocurrency wallet, the other spouse may liquidate the appropriate amount of cryptocurrency and transferring the liquidated value to the other spouse.
Alexis Garcia Connors is an attorney at Boyd Collar Nolen Tuggle & Roddenbery. She helps her clients with all types of family law matters, including complex divorce litigation, child custody and support disputes, and paternity and legitimation, to name a few.