Dividing Cryptocurrency During Divorce

Marital property is one of the biggest offenders of a lengthy divorce. The classification, valuing, and distribution of a couple’s jointly held assets is a herculean task, even on the best of days. But this complex financial beast becomes even more interesting, once you add cryptocurrency into the mix.

But what is cryptocurrency? How does it work? And—more importantly for us—why does it cause so many problems for divorcing couples?

Here’s what you need to know about dividing cryptocurrency during divorce, and how the team at Maples Family Law can help ensure your interests are protected.

 

What is Cryptocurrency?

Cryptocurrency (also known as “bitcoin,” “digital gold,” and—our personal favorite— “magic internet money”), refers to a type of digital currency that can be exchanged for online goods and services. These transactions take place exclusively over the internet, and do not have a physical form. 

Instead, digital coins are kept in an online “wallet,” which is accessed by a private “key” and password (rather than a person’s name). A wallet’s transactional information is stored in a “blockchain,” which breaks its data down into “blocks” that cannot be strung together in a “chain” without the proper passwords. 

Today, there are thousands of different cryptocurrencies on the market. Some (such as “Bitcoin”) are widely accepted by many different internet vendors. Others are small company tokens, which give their owners access to the products and services exclusively tendered by that company. 

Cryptocurrency’s focus on peer-to-peer business means that consumers can initiate transactions all over the world for a fraction of the cost of a traditional bank or institution. In addition, exchanges are faster, more private, and use a currency that cannot be inflated by the whims of international markets. All of which makes digital coin an attractive investment for couples looking to branch out. 

Unfortunately, these same perks can also end up causing couples a lot of heartache, if they ever get a divorce.

 

Dividing Cryptocurrency During Divorce

California courts divide digital coin the same way as any other marital asset: by applying the rules of community property

This process requires the court to:  

  1. Identify property.
  2. Characterize property as either separate or marital.
  3. Value all property (including debt).
  4. Divide property between spouses. 

The problem is, that while the process of dividing cryptocurrency is technically the same, applying these steps to digital coin can cause some unique headaches. 

Here’s a closer look.

 

1. Identifying Property

Before cryptocurrency can be characterized, valued, or divided, the court must first identify it. 

This isn’t too hard, if both spouses are aware of a wallet’s existence, and, of course, so long as each knows the key and password. If not, however, the task of identifying cryptocurrency can quickly turn into an epic game of Financial Hide and Seek. 

Cryptocurrency is specifically designed with security and privacy in mind. No names. No central database. Both great things for a consumer looking for privacy, but not when you’re trying to find your spouse’s secret piggy bank during divorce. 

If you think your spouse might be trying to hide cryptocurrency assets, your attorney should pay special attention to: 

  • Include cryptocurrency question on the financial inventory; 
  • Review bank records for transactions involving cryptocurrency companies; 
  • Comb through tax records for cryptocurrency references;   
  • Subpoena all cryptocurrency records and documents; 
  • Search computers, cell phones, and external hard drives for cryptocurrency information; and, of course,
  • Ask about cryptocurrency during testimony.  

With any luck, your spouse will be forthcoming, and will not try to hide assets form the court (which is both difficult, and very stupid). 

 

2. Characterizing Property

After all of your cryptocurrency assets have been identified, you will need to characterize the property as either separate, or marital. 

In California, anything that either spouse acquired during marriage, belongs to both, equally—regardless of whose name is on the paycheck, card, loan, or deed. These jointly held assets are called “marital property,” and are subject to division, upon divorce. 

On the other hand, assets acquired before tying the knot are considered separate property, and will (theoretically) leave with their respective owners, once the partnership dissolves. 

Hence, in theory, crypto that you owned prior to marriage (as well as whatever property or increase came as a direct result of said crypto) likely belongs to you, outright. However, characterization is rarely that straightforward. 

The problem is: real life doesn’t work that cleanly. While married, couples hardly ever keep track of an asset’s history as well as they should. Accounts get mixed, funds blurred, and before you know it, assets are so mixed up, that it’s impossible to tell where separate property ends and marital begins. In these situations, the judge rules the property commingled, and throws it into the marital pot for division.

On the bright side, once you have successfully constructed a wallet’s blockchain, determining its history (and exact worth) becomes relatively simple. Without it, however, it may be necessary to call in a financial expert. 

 

3. Valuing Property

Another downside to cryptocurrency, is that its value is in a state of constant flux. A thousand dollars one day can change to fifty the next week, meaning you never know quite what you’ll take out, once you invest. 

When dividing cryptocurrency during divorce, your investment will be valued based on its worth at the time of your divorce—not on your original investment. 

To compensate for volatile market shifts, judges will generally order this valuation to take place as closely to settlement (or trial) as they can, in order to ensure that the division of marital property is as accurate as possible. 

 

4. Dividing Property

Once cryptocurrency has been identified, characterized, and valued, it’s time for the actual division, which is done according to the rules of community property (unless, of course, the couple has a valid prenuptial agreement that supersedes standard procedure). 

In a community property jurisdiction, anything characterized as marital is divided equally between spouses. However, this does not necessarily mean fifty-fifty, since community property focuses on giving each spouse an equal share of the marriage’s value, rather than an exact share of everything. 

That being said, when it comes to cryptocurrency, fifty-fifty can actually work well. By dividing the bitcoin, itself, into equal shares (rather than trying to nail down a shifting value), each spouse can walk away knowing their portion is equitable, regardless of how the market might shift between valuation and trial. 

 

Previously Undisclosed Assets

While cryptocurrency might be easier to hide than other real-world assets, nothing is impossible for a skilled financial guru, and the failure to disclose cryptocurrency (or its full value) to divorce court can have severe consequences. (Just as this lady, who was ordered to turn over a million-dollar lottery ticket to her spouse, after failing to disclose it during divorce.)

Bottom line? The consequences for previously undisclosed assets hurt a lot more than simply parting with funds in the first place, so it’s always better to simply disclose it upfront.  

Cryptocurrency Divorce Attorneys in California

Dividing marital property is a complex financial beast—a task that only gets more involved, once cryptocurrency enters the mix, which is why choosing the right attorney is so important. 

If you have more questions about dividing cryptocurrency during divorce, we want to hear from you. Call one of the skilled, Maples Family attorneys today at (209) 989-4425, or get in touch online, and together, we can make sure your cryptocurrency is handled properly.