There’s something new in divorce disputes: The Bitcoin Battle
By now, Bitcoin has become a household name, and it is becoming a more common issue in divorce. The cryptocurrency, minted in 2008, was created to erase the need for a middle-man in electronic transactions by basing transactions on computer code and cryptography. Bitcoin is still that, but it has also become a darling for many investors trying to catch the next Bitcoin bull-wave.
As of writing this, one (1) Bitcoin is valued at about $4,000.00, which may seem like a lot for a string of code. However, only a little over a year ago, Bitcoin was trading at almost five (5) times that amount! These volatile highs and lows have ignited a firestorm of buying and selling amongst a subset of the American population, largely men in their thirties, creating a scenario akin to the day-trading boom of the 1990s, and divorces involving Bitcoin and other cryptocurrencies are becoming more common. It’s been estimated that roughly 8% of the U.S. population owns some form of cryptocurrency today, so this isn’t an issue impacting every divorce, but it’s a growing concern that I expect to see more and more of in the years to come.
The basic principles still apply
Cryptocurrencies, such as #and the dozens of others like them, may be “new,” but dealing with the division of these assets in divorce begins with the same basic steps as any other:
Identify – The first step is to find it!
Cryptocurrencies are identified in divorce like any other asset – through discovery. Discovery – i.e. information gathering – in divorce is nearly an open-book process. A divorce practitioner has a multitude of tools at their fingertips to uncover financial information from an opposing party, including: inventory requests; requests for production; subpoenas; depositions; financial releases; etc.
To determine if an estate includes cryptocurrency, an attorney should:
- Provide inventory and appraisal forms to complete that include specific questions about cryptocurrencies
- Request all documents related to cryptocurrencies, such as statements or purchase records
- Review bank records for purchase of cryptocurrencies on crypto-exchanges
- Review tax records for reported gains or losses attributed to cryptocurrency
- Subpoena bank and crypto exchange records
- Image computer hard drives for crypto storage and transaction information
- Search electronic correspondence for crypto trade references
- Ask questions about cryptocurrencies when taking depositions or testimony to get answers under oath on the record
Characterize – Yours, mine or ours?
Once identified, Texas laws regarding the division and award of assets would still apply to this digital currency. Therefore, the court would presume the property “Community” and therefore divisible between the spouses. If a party proves the crypto was acquired prior to marriage, via inheritance or gift, the currency could be confirmed as a party’s “Separate Property,” and the court could only award it to that spouse. One beauty of the Bitcoin technology is that all transactions are recorded on a digital ledger (the Blockchain), and anyone can search and discover the timestamped transaction to see when the currency was purchased or obtained. This provides parties the ability to trace when the coins were acquired, thereby determining the “Community” vs. “Separate Property” distinction. But when individuals make frequent trades, buying and selling crypto and other assets, the waters can get murky. It is often best practice, in those instances, to engage in a forensic accountant to help connect the dots.
Value – What’s it worth today – and next week
Like stocks or commodities, cryptocurrencies are traded and valued on exchanges. While values have been volatile, like a stock price that varies with market fluctuation, your attorney can value the currency by looking to the exchange price at any given moment. And because the values are volatile, it is critical to value that currency as close to settlement or trial to ensure an accurate valuation. Also, for determining any tax liability or refund the estate may hold, be sure to determine what gains or losses the parties realized.
Divide – Three ways to split it up
Once found, characterized and valued, cryptocurrencies should be awarded and/or divided between the parties. The major cryptocurrencies, unless they have a restriction built into the coin, can be transferred on an exchange or cashed out. So, if the spouse who does not hold the coins wants to be transferred the currency in crypto, that spouse can open an account on an exchange and have the currency transferred into their name. Or, the holding spouse can cash out the currency to award the other spouse USD. The benefit of the transfer method is the parties avoid fees; however, a spouse may not want to be awarded a volatile asset like cryptocurrency and prefer a 2-3% fee to cash-out. You can also negotiate a settlement that allows the spouse who holds the cryptocurrency to keep it in exchange for the other spouse keeping other assets of equal value. Beware though, as the party taking the lion’s share of the crypto will take all the risk and reward with that asset!
The Bitcoin bottom-line
While Bitcoin should be treated like any other asset in divorce – it is not just any other asset. The technology, exchange and value of this new currency can be complex. Those divorcing, who hold cryptocurrency or believe their spouse may, should consult an attorney with specific knowledge of these digital assets, to ensure their rights are protected.
More to come
- Coming up in future posts
- What’s in that wallet? – Everything you need to know about the “Bitcoin Wallet” – how cryptocurrencies are bought, stored, tracked, etc.
- Blockchain and beyond – Bitcoin is only one of dozens of cryptocurrencies owned by couples considering divorce, what are the others, and what is blockchain all about?