Divorce and Cryptocurrencies: Navigating Asset Division

Divorce often brings up the tricky issue of how to split shared assets. In many situations, it’s a straightforward process. However, when it comes to beloved pets or aquariums, things get complicated. Now, add cryptocurrencies to the mix, and the situation can become quite convoluted.

With many households still in the early days of accumulating crypto assets, recent significant declines in digital currencies like Bitcoin and ether have shaken investor confidence. For some married couples, the current value of these cryptocurrencies isn’t even a point of contention—it’s more about the potential for one partner to easily conceal assets.

“Cryptocurrencies in divorce proceedings create headaches similar to what we’ve seen with offshore accounts,” notes Mark Grabowski, a professor of cyber law at Adelphi University. “But now, assets can be moved instantly and without detection.” He emphasizes that ownership is determined by who possesses the private key, not just the account holder’s name.

“If one partner controls the wallet, they hold power over those assets,” Grabowski explains. This has prompted lawyers to subpoena exchange transactions and trace blockchain activities to ascertain whether cryptocurrencies were bought before or during the marriage.

The challenge lies in transparency. “Without clear reporting standards, one spouse could easily hide or underreport their cryptocurrency holdings. Courts haven’t fully kept pace,” he adds. In theory, a divorce involving crypto should unfold like any other. Divorce attorney Renee Bauer notes that the primary question is straightforward: “Who gets the wallet?” Yet this inquiry opens the door to numerous complex issues that wouldn’t typically arise in conventional property divisions.

The initial hurdle is figuring out what exists. “Retirement accounts have statements. Homes have addresses. Cryptocurrencies might be on an exchange or stored in a hardware wallet that one partner conveniently overlooked,” Bauer observes. Tracing these assets can turn into detective work combined with digital forensics.

Once a digital asset is identified, its location is noted. “Some people may want to keep their digital wallets, especially if one had control during the marriage, while others prefer a complete separation of finances,” she says. Courts are still trying to find the best way to manage these situations.

Another concern is security. If one spouse gives up the private key, they lose control. If they refuse, the court must decide how to enforce access. Bauer recalls a situation where a lawyer unfamiliar with cryptocurrencies mishandled a case, mistakenly presenting a different asset’s value in Bitcoin without understanding the nuances involved.

“Many divorce lawyers are slow to adapt and may not request crucial information. In Connecticut, financial affidavits don’t specifically mention virtual currencies, which could be a significant oversight,” Bauer adds.

Asset Tracing in the Digital Age

Companies like BlockSquared Forensics are stepping in to bridge the gap. Founded in 2023 by Ryan Settles, this Texas-based company specializes in locating lost cryptocurrencies. Settles observes that his services have seen a significant uptick, especially for spouses suspecting that their partners may be hiding crypto assets.

BlockSquared offers various services, from basic asset verification to comprehensive investigations. They provide spouses with detailed reports tracing cryptocurrencies across wallets and exchanges. “This trend is particularly prevalent among high-net-worth divorces,” Settles states.

He highlights that as virtual currency becomes more common, understanding the tax ramifications in a divorce becomes crucial. “Most lawyers aren’t familiar with the myriad tax issues involved,” Settles explains, noting that many individuals, especially wives, end up facing hefty capital gains taxes when dividing assets that were previously unknown to them.

“Unlike regular savings, the value of cryptocurrencies can change drastically within a day,” Bauer adds. “Selling to divide proceeds can trigger capital gains, while holding assets poses further arguments if values shift.” The IRS guidelines for cryptocurrency reporting are becoming stricter, complicating matters further.

Settles mentions that his services may cost more than standard legal fees, with initial investigations running high. However, they often only get involved when there’s strong suspicion of hidden assets.

Understanding the Legal Framework

Roman Beck, a Bentley University professor, advises that courts should focus on the assets controlled by wallets instead of the wallets themselves. “For tax and most property law perspectives, cryptocurrencies are treated as property, not as currency,” he states.

During divorce proceedings, assets like Bitcoin and Ether are typically included in the marital estate, and how that wealth is divided will vary by state. “Courts don’t divide wallets; they assess the values,” Beck clarifies.

The core legal question shifts from “Who gets the wallet?” to “How do we allocate the economic value represented by the wallet?” This could involve splitting on-chain holdings or liquidating currencies to balance other assets.

Given cryptocurrencies’ volatile nature, timing the asset division can become a significant hurdle. “The price of Bitcoin has seen dramatic fluctuations,” Beck points out, highlighting how market changes complicate negotiations. The easiest solution might be to create separate wallets for each spouse, allowing them to maintain shared investments, or to appoint a third party to manage these assets until market conditions improve.

Despite the challenges, Beck insists there are no significant obstacles preventing couples from holding crypto using legal agreements that delay liquidation until both parties agree on favorable market conditions.

The Role of Blockchain in Divorce

While cryptocurrencies are often perceived as secretive, their transparent nature can aid in divorce proceedings. Beck explains that public blockchains, like Bitcoin, keep an unalterable record of all transactions, turning the blockchain into a reliable financial witness.

Recent surveys indicate a growing number of Americans are adopting cryptocurrencies, presenting family law with more data-driven approaches. “Transparent ledgers and analytics enable clearer tracking than traditional cash transactions,” Beck notes, suggesting that courts may need to enhance their scrutiny in divorce cases.

However, attempts to conceal assets persist. Settles often sees swift movements in the ledger, as individuals try to obscure their holdings. “They scramble their assets, move things, hide them,” adds Settles, emphasizing that these actions, while clever, remain traceable.