What Happens to Bitcoin in Divorce Asset Division?

?As the buzz around Bitcoin and other cryptocurrencies grows, it’s?estimated?that 1 in 20?Americans?now?own some amount of?this new?“digital cash.”?Given its rising popularity, it is little surprise that cryptocurrency is also turning up as a prime marital asset in more and more divorce cases.???

?I wrote about cryptocurrency and divorce recently in article published in the New Jersey Law Journal:?“Who gets the Bitcoin in the divorce?”?I took a deeper look at the questions?—?and confusion?—?that are often triggered when discovery and distribution involve cryptocurrencies.?

Do you have clients who own Bitcoin and you’re still not sure how this Wild West of money really works? Or do you own cryptocurrency yourself (or your spouse does) and want to know how asset division applies to this online-only money? Here are some answers to questions about Bitcoin and cryptocurrency and what happens to it in divorce.??

?Q: What is cryptocurrency??

At its most basic, cryptocurrency is a way to remove the bank or credit card middle man when purchasing goods and services online.?Cryptocurrency is a?peer-to-peer system for creating?“digital cash.”?Bitcoin is the most popular cryptocurrency. Other forms of crypto include Ethereum, Ripple and?Zcash.??

?Bitcoin and other digital currencies are initially obtained through a cryptocurrency exchange website.?Bitcoin (or?other?cryptocurrency) is?then?stored in an encrypted digital wallet?set up through the site. Users receive?special public and private?“keys” —?long strains of numbers and letters?—?that identify the wallet and serve as its address.?Transactions are?encrypted in a blockchain and?listed?only?by public key hashes, not by the wallet owner’s name.?An?“open ledger system”?makes all transactions viewable by all users to ensure security.??

?Bitcoin owners can buy goods from the many online retailers (and some brick-and-mortar retailers) that accept it. Bitcoin is also used for peer-to-peer buying and selling.???

User cans even?“mine”?for new Bitcoin by having their computers solve complex mathematical equations. What’s important to remember is none of this activity is regulated by a bank or any central authority.??

Q: Is?cryptocurrency actual money?—?or something else????

For guidance on considering which box cryptocurrency fits in,?we can look to the?Internal Revenue Service. In recent years, the IRS has formed stricter standards for reporting digital currency. According to IRS Notice 2014-2, virtual currency is to be treated as property for federal tax purposes. Depending on the taxpayer's circumstances, cryptocurrency holdings can be classified as business property, investment property, or personal property.??

Notably, cryptocurrencies are?not?treated by the IRS as a foreign currency (Section 988).?For tax purposes, any?exchange of cryptocurrency (buying or receiving) is treated as a property transaction.?

?Applying these IRS definitions to divorce, cryptocurrency?is?a property asset. And just like?other property that?accumulates?over the course of a marriage, cryptocurrency is subject to New Jersey’s equitable distribution law.?

Q: How is cryptocurrency documented during divorce discovery???

?The discovery process in divorce is crucially important for bringing cryptocurrency holdings to the surface. Discovery generally begins with the?New Jersey Family Part Case Information Statement?(CIS), which requires each party to report comprehensive financial information, including a list of?all?assets in Part E.?Assets that do not fit into neatly defined categories?can?be listed in No. 11 as?“Other.”??

?If one or both spouses owns cryptocurrency, it should show up on the CIS. As always, divorcing spouses have a fiduciary duty to one another and each must sign a CIS under penalty of perjury. If there is reason to believe a CIS is incomplete?for any reason,?including a lack of disclosure of known or suspected crypto holdings,?following up with formal discovery such as interrogatories and depositions can often ferret out missing information.?

?For anyone not familiar with cryptocurrency wallets, be aware that documentation to substantiate the asset?could be a?simple printout of their wallet(s) activity. Compared to an?activity report prepared by a?third party?financial institution, cryptocurrency documentation may feel underwhelming.?However, here is where the blockchain?“open ledger”?system becomes useful. With some basic software, anyone can take the public key information listed with the wallet to verify each and every transaction.???

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Q: How can you tell if one spouse is hiding Bitcoin????

?For a spouse looking to hide money,?Bitcoin?could look seductive?at face value. Cryptocurrency?has a high degree of?anonymity?—?transactions are recorded in key hashes, not names, and when setting up the digital wallet, some platforms require only minimal identification (i.e., email address only).??

But not so fast. While?cryptocurrency?activity may be devoid of real names or?third party?oversight,?there are many ways to pick up the digital trail.?Sometimes the detective work is easy?—?transactions made to a known cryptocurrency trading exchange may turn up on credit card or bank statements. Sometimes, it’s a little more involved. Was a large purchase made on Amazon shipped to an unknown person? This may have been an initial exchange for a Bitcoin.?

?Are there other unexplained?bank?withdrawals?or credit charges? Does iPhone app store activity show that a spouse downloaded a crypto trading and/or wallet app? Is there activity associated with this app??For more red flags of secret Bitcoin accounts, see our blog:?5 Signs Your Spouse Is Hiding Bitcoin In Your Divorce.?

In some situations, enlisting the help of a forensic accountant with experience in crypto assets may be needed. If?hidden assets are eventually unearthed,?the?courts?can order the?victim’s?attorney and?any?expert fees?be paid by the misleading spouse.?A judge who finds that one spouse has not been forthcoming can?also?take this into account when determining an equitable division of assets and may award the innocent spouse a greater share.??

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Q: How is cryptocurrency valued????

You see that your client’s spouse has a Bitcoin wallet with 10 Bitcoins contained within. What does that equal in dollars and cents??Current market pricing is easily obtainable for cryptocurrencies traded on exchanges such as Coinbase.?

But there’s just one problem with determining the dollar value of Bitcoin?—?and it’s a big one. Historically, cryptocurrency has gyrated unpredictably in value. This means that the market pricing you see one day may be extremely different than what you see the next.??

In New Jersey, asset values are most commonly set on the date a divorce complaint is filed. However, there?is?evolving recognition that another date, such as the date of distribution, may be more appropriate. This is particularly true in the case of a passive asset (such as a cryptocurrency) whose value fluctuates exclusively—and sometimes wildly—due to market conditions.?The valuation date that is best for your client may require added strategic thinking.??

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Q: How is cryptocurrency divided during asset distribution?

During asset division, the most obvious option may be to?sell the cryptocurrency on an exchange, taking the dollar value that results, and dividing it per equitable distribution. As noted,?market?volatility may make it difficult to determine the optimal timing of the sale. Another drawback is the tax ramifications of paying capital gains tax on the amount the sale generates.??

Another strategy?is to simply?set up a unique digital wallet for the other spouse and sending their share of the Bitcoin to the wallet. Given the growing number of establishments that accept Bitcoin for goods and services, the receiving party may find using Bitcoin to be a convenience.?Some major online sites that accept Bitcoin include Overstock, Expedia,?Paypal?and Microsoft.??

If cryptocurrency is offered as a buyout for home equity or as leverage for negotiating other property, volatility may again be the ultimate factor to look at in these situations.?For any strategic exchange, cashing out in dollars and cents first is the lowest risk proposition.?

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Bitcoin is here to stay?

In 2018, cryptocurrency reached a major milestone when its market cap hit $300 billion. If it still feels novel for cryptocurrency to show up on the divorce CIS, it’s now clear: Bitcoin isn’t going anywhere.??

For attorneys, it’s imperative to embrace the digital future of asset division and the new thinking it requires. The time is now for forward thinking about how to use Bitcoin as a vital asset in divorce distribution.???

There are?so?many more questions to be answered about Bitcoin?—?I encourage you to leave me?questions?in the comments below, or email me [email protected]. Let’s continue this conversation.??

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Bari Z. Weinberger, Esq. is a certified Matrimonial Law attorney in New Jersey. She has received an?"AV Preeminent?" Martindale-Hubbell Peer Review Rating based on the exemplary work in the field of family and matrimonial law, and is the recipient of countless awards and recognitions. Ms. Weinberger is the Associate Author of the New Jersey Family Law Practice, 15th Ed., a 5-volume treatise utilized by virtually every family law judge and practitioner in the State of New Jersey and is published by the New Jersey Institute for Continuing Legal Education.

Ms Weinberger is founder and managing partner at Weinberger Divorce & Family Law Group, New Jersey’s largest family law and divorce firm, devoted exclusively to family law.