Dividing Cryptocurrency in Divorce

Cryptocurrency and Divorce

A growing concern among couples getting divorced is whether one spouse has cryptocurrency, and if so, where is it stored and who gets it? Here’s what Texas divorcees need to know about cryptocurrency in divorce – and why it is such a gray area.

Understanding Cryptocurrency

Cryptocurrency (bitcoin, ethereum, etc.) refers to digital currency that uses an online blockchain ledger to manage and reconcile transactions. Blockchain is just a fancy way of saying the information is decentralized so that everyone on the connected network has the same, verifiable information. “Crypto” refers to the cryptography that’s used to keep everything secure.

Cryptocurrency has a number of advantages. First, transactions are settled in minutes, rather than days. Second, transactions are confidential. Although the transactions are verifiable over the network, they do not contain personal identifying information. Third, it allows for transactions without a traditional bank account.

As the value of cryptocurrency fluctuates (bitcoin has had months where its price changed by 300 percent), there are real problems with placing a value on cryptocurrency. Divorce attorneys are facing new issues when dealing with bitcoin assets during divorce proceedings.

Is Cryptocurrency Considered “Currency” in Texas?

Some states recognize cryptocurrency as money, while others do not recognize it as tangible property or currency.  Therefore, there does not seem to be any consensus among state legislatures that would suggest how cryptocurrency should be treated in divorce proceedings.

Under Texas House Bill HB4474, Texas does recognize cryptocurrency as a form of currency. Therefore, as a marital asset, spouses must consider this as part of the distribution of assets in their divorce.

Cryptocurrency in Divorce

Whether cryptocurrency is purchased or mined, its existence creates problems for divorcees. For starters, both spouses may not be aware of its existence. And even if the currency is located, valuation is difficult with prices changing every minute. Unlike stocks, the prices can change around the clock, every day of the year. The “markets” never close.

Additionally, cryptocurrency can be used to hide marital assets. Cryptocurrency can be stored in online accounts, on hard drives – almost anywhere. The assets are rarely disclosed and are often not reflected in tax returns. This means it might take a forensic accountant or a legal expert to sift through and find where assets are hidden. CNBC reported over 20 million Americans own cryptocurrency. You may not know if your spouse has been squirreling money away in cryptocurrency.

There might also be significant tax implications to negotiating cryptocurrency settlements, including liability for failure to report past cryptocurrency income, as well as future implications if the asset sees significant growth. While a divorcing spouse has a duty of candor and disclosure, the reality is some (or many) individuals believe cryptocurrency can be easily hidden. It takes an experienced attorney and often forensic investigations to track transactions and locate cryptocurrency purchases.

Cryptocurrency to Pay Child Support and Alimony

Courts across the nation are split over whether alimony or child support can be paid using cryptocurrency. Many courts have expressed concerns about the challenges in tracing funds that are moved into crypto accounts, particularly offshore crypto accounts.

Bitcoin as a Crime in Divorce

The bitcoin community is fighting back against bitcoin being labeled or declared illegal currency, but bitcoin can certainly be used to conduct illegal activities, such as paying for drugs and other illicit activities. Bitcoin could be considered as a factor in divorces involving crimes or drug use that would justify a larger share of assets by the innocent party.

Bitcoin and the IRS

In 2014, the Internal Revenue Service (IRS) declared that bitcoin will be treated like property for federal tax purposes, which means bitcoin transactions are technically counted as sales (not income). The federal government, in its recently proposed bitcoin regulations, has indicated that bitcoin transactions are taxable events. The practical implication of these rules means bitcoin is taxed as if it were an investment vehicle.

When a person spends bitcoin for goods or services, they will be subject to capital gains taxes on the appreciation between the time of purchase and the time of sale. A spouse who acquired bitcoin four or five years ago may have experienced significant growth but may also be subject to long-term capital gains taxes when they sell.

Bitcoin and Real Property

Bitcoin and other cryptocurrency transactions may affect real property (for example, bitcoin acquired during the marriage that was later used to buy a home or fund a bitcoin mining operation). Bitcoin and cryptocurrency transactions may also involve gains from foreign currency exchange rates. If bitcoin was used to purchase any kind of property during a marriage, it can prove legally challenging to have an equal division of property that is fair to both spouses.

Bitcoin and Cryptocurrency Challenges in Divorce

As Bitcoin and cryptocurrency become more widely accepted, it is likely that divorcing spouses will have disputes about cryptocurrency ownership, valuations, tax treatment, and tracing. Cryptocurrency’s status as an alternative currency is still being defined and, therefore, there are substantial challenges it may bring to a divorce.

Avoiding Divorce Conflict Regarding Cryptocurrency

To avoid divorce conflict over these issues, you should consider addressing cryptocurrency in your marital settlement agreement or in an accompanying letter ruling request.

You can include any of the following provisions:

1. The cryptocurrency is classified as separate property rather than marital property unless they are sold or exchanged for marital property.
2. Valuations are performed on the day of final separation, and any appreciation in bitcoin value after that date is non-marital property retained by the spouse who initially owned it.
3. Cryptocurrency investments may be traced into other marital assets based on their original cost basis despite fluctuations in bitcoin price post-separation.
4. Spousal support obligations will continue should one spouse’s investment in bitcoin decline due to market changes following separation.
5. Transferring cryptocurrency to a third party does not terminate title so long as the receiving party has no knowledge of illegal activity related to those funds.
6. Cryptocurrency ownership disputes should be resolved in civil court based on bitcoin’s market value at the time of separation.

Contact Us

Bitcoin and other types of cryptocurrencies recently exploded in popularity and valuation, which can present significant legal implications for divorcing couples. Bitcoin owners should consider seeking advice from an experienced family law attorney who can help protect their interests throughout the divorce process, including determination of cryptocurrency ownership, maintenance of records regarding investments, and allocation of profits post-separation. Varghese Summersett Family Law Group can work with you during your divorce to help protect your legal and financial rights, and help you understand how Bitcoin or cryptocurrency in divorce may impact the distribution of your assets. Contact one of our experienced attorneys today at (817) 900-3220 to learn more.