Bitcoin, Cryptocurrency, and Hidden Assets in Divorce

Virtual currency, also called cryptocurrency, is everywhere right now – finance experts are talking about it, it’s popping up on online shopping sites, there are stories on the news, and you may have even looked into it yourself. Bitcoin and similar digital currency were once only available to seasoned technology investors, but today anyone with an internet connection can have access to cryptocurrency. Whether or not you find virtual coin controversial – it is unregulated and wildly volatile in value – if you or spouse own any, it might be a marital asset.

Another thing about cryptocurrency is that it is easy to conceal, and if you are concerned about your spouse hiding assets during the equitable distribution process of your divorce, you should know what to look for.

What is cryptocurrency?

The finance website Nerdwallet describes cryptocurrency as “a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions.” You can think of cryptocurrency as a sort of digital token that you purchase with real currency and then exchange online for real goods and services in an extremely secure manner.

The most popular digital currency today is Bitcoin, but Nerdwallet reports there are currently over 6,700 publicly traded cryptocurrencies with a combined value of $2.2 trillion. The top five and their values of April 2021 are:

• Bitcoin: $1.2 trillion
• Ethereum: $263.4 billion
• Binance Coin: $87 billion
• XRP: $81.8 billion
• Tether: $45.4 billion

How does virtual currency work?

Bitcoin and similar currency are very different than regular money. Its value at any moment is determined by what others are willing to pay to have this kind of money. Unlike a dollar issued by the United States Treasury, which in the U.S. is and has always been worth a dollar, a single crypto coin may be worth anywhere from a nickel to $60,000. The more popular the currency is, the more it will be worth. Further, you can own a less than a full single “coin” of any of this currency – you can buy a fraction of a coin.

Where is the crypto currency kept? Currently, most cryptocurrency is held in trust by exchanges who charge a transaction fee for the purchase and sale of such coins. The most popular exchanges are Coinbase and Kraken, but there are many others out there. Most can be accessed through a phone app or through an internet browser account. The exchange stores an owner’s “key” which must be used in order to buy and sell crypto-coins and convert them to money. This is a whole new way of thinking about money and can be very confusing, which is why you need an experienced attorney to help you discover whether your spouse has such money and ensure that you are given what the law allows.

How do I know if my spouse is hiding cryptocurrency?

The first step of equitable division while going to court or trying to settle matters through a separation agreement is listing and categorizing your assets as separate or marital property. In general, anything you or your spouse acquired during the marriage for the benefit of the marriage counts as marital property (excluding gifts, inheritance, and anything you owned before you were married – this is separate property that is not divided). Marital property does include things like investments and digital currency, and both spouses are required to disclose all assets during the discovery part of the process. See this statute for the statutory definition of these terms.

Although cryptocurrency is indeed easy to conceal, it is not impossible to find. Your spouse might have one or more cryptocurrency exchange apps on their smartphone, like Coinbase. Bank and credit card records may show large unexplained online purchases, patterns of small withdrawals from the bank through ACH transfer to an outside entity, or secretive behavior around finances. Do not assume your spouse knows nothing about cryptocurrency and does not have any; investment in cryptocurrency has exploded in the last two years, and many have begun to experiment with it as an investment.

Your divorce attorney can guide you on next steps, like hiring an expert to download phone and computer data that would show any activity with cryptocurrency, reviewing records for tell-tale signs of someone trying to siphon off and hide assets, and even working with a forensic accountant when your finances are complicated.

Can you divide cryptocurrency in a divorce?

If your attorney does identify assets like Bitcoin, they will be treated like any other joint asset and therefore subject to equitable distribution. If there is any question as to when the cryptocurrency was acquired, digital transactions are timestamped, so determining whether or not it was purchased during the marriage is simply a matter of looking at the transaction history.

In terms of the timing of when to divide marital digital currency, it is important to keep in mind that the value of assets like Bitcoin constantly fluctuate, sometimes wildly. An experienced family law attorney from Hartsoe & Associates who is also well versed in finance and investments can help you assess the timing of every aspect of the complicated journey of separation and division of assets.

They can help answer your questions, provide resources, and guide you in an appropriate direction. Consider the following if you are thinking about accepting a share of your spouse’s cryptocurrency and whether it is right for you:

• Do you understand the basics of using Bitcoin and cryptocurrency apps?
• Will you have a safe place to store your virtual wallet and password?
• Do you foresee any tax liabilities from transferring funds or cashing out (the IRS issued new guidance on the taxability of these types of assets and it is complicated, as usual)?
• Is cryptocurrency a good addition to your investment portfolio?

Because cryptocurrency is still relatively new and unregulated, there are currently no specific laws around it regarding divorce. However, North Carolina took a step toward recognizing cryptocurrency with the Money Transmitter Act of 2016. This defines virtual currency as “a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account, or a store of value but only to the extent defined as stored value under G.S. 53-208.42(19), but does not have legal tender status as recognized by the United States Government.”

This gives Bitcoin and other virtual currency legal recognition, and therefore cannot and should not be left off any list of financial assets during equitable distribution.

What about taxes and cryptocurrency?

The issue of how both a state and the IRS will tax any “gains” in the value of cryptocurrency is a matter of rapid change, hot debate, and court battles that are still raging. You cannot afford to fail to consider the tax consequences of transferring cryptocurrency or any other valuable asset when you divide the martial assets in divorce.

If you believe your spouse may be concealing assets, or if your marital finances have you dealing with complicated issues like cryptocurrency, small business valuation, consult an experienced divorce attorney today. Hartsoe & Associates, P.C. is uniquely positioned to deal with the most complicated aspects of property division in divorce with its experience in the areas of bankruptcy law, tax law, business valuations and sales, business creation and governance, business litigation, and a background in finance and insurance. We invite you to call us at 336-725-1985, or reach out to us through our contact page to tell us your story. We maintain offices in both Winston-Salem and Greensboro.