How is Cryptocurrency Handled in Divorce?

Cryptocurrencies – Bitcoin, Ethereum, Lytecoin, and others – continue to fascinate people around the world. What started off as a mere novelty for most has gradually transformed into a global sensation, something which has caused many to question their basic notions of money and value. With all the crypto-related activity taking place, cryptocurrency is becoming increasingly relevant in family law cases. So, how are cryptocurrency holdings treated in a Maryland divorce? Let’s take a closer look at this issue.

Basics of Cryptocurrencies: Bitcoin and More

Before we discuss crypto holdings in a Maryland divorce, let’s first briefly go over the essentials of cryptocurrency. Cryptocurrencies – or “digital currencies,” “virtual currencies,” etc. – are forms of digital money which can be used to purchase goods or services, just as normal currencies. At present, there are many different types of cryptocurrency, but all types tend to share certain characteristics: cryptocurrencies have no physical substance, are stored in digital wallets, utilize publicly viewable transaction ledgers, and involve collaborative problem-solving in order to both verify current transactions and generate additional cryptocurrency units. Many people have started investing in cryptocurrencies in the hope that a given type will increase in value. With this being the case, we should expect that the division of “marital cryptocurrency holdings” would be a major point of contention at some point. 

Seminal Publication: IRS Notice 2014-21

When thinking about how crypto holdings are handled in divorce, let’s first consider IRS Notice 2014-21, a seminal publication on the matter of classifying cryptocurrency for tax purposes. In this document, the IRS declared that cryptocurrencies are intangible personal property, similar to stocks or bonds, and are therefore subject to tax on any recognized gains. If an investor purchases Bitcoin for $50,000, but then turns around and sells that Bitcoin for $60,000 several days later, that investor will incur a tax on the $10,000 in profits from the sale. The IRS applied general tax principles to cryptocurrency as intangible personal property, and this has huge significance for property division in divorce.

Dividing Crypto Assets

When a couple divorces and one or both parties have cryptocurrency holdings, the critical question will be the same as it would with any other property: are the holdings separate property, or marital property? Marital cryptocurrency holdings will be subject to division based on the principle of equitable distribution, whereas separate cryptocurrency holdings will remain separate. In practice, dividing cryptocurrency holdings presents a number of challenges for courts and the parties of a divorce.

For one thing, by its very nature cryptocurrency holdings are not easy to trace and identify, and so some parties may hide their cryptocurrency holdings during the divorce process. What’s more, if a crypto investor does hide his or her holdings, uncovering this fact can be particularly difficult for courts because they may lack the resources to verify holdings. Furthermore, it’s fairly common that even when one spouse holds crypto assets, the other spouse has minimal understanding of the cryptocurrency market, making it difficult for them to acquire and use crypto. Dividing cryptocurrency also requires a “digital wallet,” something which one party may not have. Finally, the value of cryptocurrency fluctuates frequently, and can change significantly even in a short period of time (which is especially relevant over the timeline of family law matters, which are not typically resolved quickly).

These factors can add an extra layer of difficulty when trying to divide holdings in the divorce. In these scenarios, judges may simply be inclined to assign all marital holdings to one party and then adjust the remainder of the property holdings accordingly. 

Tracing Cryptocurrency Assets

As previously mentioned, crypto is inherently difficult to trace because crypto is controlled only by the individual(s) who has the private key, and there exists no centralized registry of ownership. While difficult, there are some ways crypto assets can be identified if not disclosed by one party. Specifically, forensic experts may be able to trace crypto transactions, especially if the spouse seeking to uncover the assets knows that “digital wallet” address associated with the other party’s crypto holdings. Alternatively, if the wallet address is unknown, experts can examine certain documents, such as tax returns, bank statements, credit card statements, and other financial records, to try and ascertain whether an individual made purchases from a crypto exchange, used a cryptocurrency ATM, or conducted other crypto-related transactions. From there, they may be able to obtain enough information to trace assets. As you can imagine, this work can be costly, but in high-net-worth cases where a large amount of crypto could be at stake, it may be a worthwhile pursuit.

Cryptocurrency is still an emerging field, but it’s one which has grown by leaps and bounds in such a short period of time already. If cryptocurrency is an issue in your matter, reach out to our experienced team today at Z Family Law by calling 301-388-5528.