I find it interesting that dogs even exist, in their current state. How did a creature that was a wolf (and biologically is still essentially a wolf regarding chromosomes, etc.), become a creature that is adept enough at co-existing with us to comfortably travel with their humans in a car, for instance?
Being a divorce lawyer has certain similarities—we must constantly be adapting to changes in the law, but also changes in society. I never thought when I was in law school that something like cryptocurrency could be an issue in a divorce case, but a few short years after graduating I found myself writing the first national article for divorce lawyers to tackle the subject.
In full disclosure, for quite some time my general attitude toward “cryptocurrencies” had been as follows: ignore them and hope they go away. Unfortunately, neither divorce lawyers nor our clients can afford to bury our heads in the proverbial sand.
Cryptocurrencies and “block-chain” technology may or may not be the wave of the future, but they are an increasingly commonly held “asset” class—and one that will have to be dealt with in equitable distribution and in divorces in general. As usual, the law tends to lag behind technology, meaning there are few if any published opinions on this subject even at this late date.
OVERVIEW OF “CRYPTOCURRENCIES”
Cryptocurrencies (“cryptos”) are a form of decentralized virtual currency that were created in 2009 and have been increasingly traded, often on virtual currency platforms. They are often anonymously owned and thus pseudonymously traded. They can be stored in various avenues such as a “virtual wallet,” on a smart phone, or in a virtual cloud. These currencies generally utilize novel “blockchain” technology to record permanent, decentralized, and encrypted transactions.
In 2014 Under Notice 2014-21 the IRS defined cryptocurrencies as follows: “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” The IRS also noted in 2014-21 that: “The IRS is aware that ‘virtual currency’ may be used to pay for goods or services or held for investment.”
Security is a great concern regarding these types of currencies. Although Bitcoin is the most well-known type of cryptocurrency, there are now various types of these “coins” ranging from Bitcoin down to “penny-stock” type of exchanges. And they have been an extremely volatile investment. During 2017 the price of one Bitcoin rose from around $900.00 to a high of $20,000. Less than a year later it was back down to $3,000.00. There have also been well-known scams, thefts, and the shutting down of crypto-exchanges. In other words, it’s the “Wild West” of “investing” (or speculating depending upon your point of view).
In a run-up commonly compared to Holland’s 17th Century “Tulipomania” bubble, the investment class has at times outpaced a hot stock market and at others cleaned people out. You can now hear about cryptocurrency investment tips while getting your hair cut, riding an Uber, or talking to your uncle at the annual family get-together. If I wrote this book even two years earlier this chapter wouldn’t even exist, now it’s an important “cutting-edge” topic to consider when negotiating certain divorces.
Their relative anonymity makes it a difficult asset to locate—meaning it may be ripe for inappropriate divorce-planning attempts. That risk coupled with its increasing use amongst the general population means that divorce attorneys must learn the basic principles of cryptocurrencies to provide clients with necessary guidance.
Cryptocurrencies and Equitable Distribution
The treatment of cryptocurrencies for equitable distribution purposes is in theory not too dissimilar from any other asset. If at the time of divorce there exists two Bitcoins and no marital exemptions apply (such as non-commingled premarital property, gifts, inheritance, etc.) then each party should generally be entitled one Bitcoin. Likewise, one party could buy the other out provided there is agreement as to the valuation. The more interesting questions arise under protecting against a party attempting to hide these digital assets.
Because cryptocurrencies can be pseudonymously transferred to others, it may be difficult to determine ownership. As divorce practitioners, what can we do to effectively foreclose such inappropriate actions?
Firstly, it may be prudent to add specific cryptocurrency questions to all initial discovery requests. Although general questions as to currencies, monies, or assets may be sufficient, it may be helpful to ask in interrogatories whether the spouse owns or has ever owned any cryptocurrencies. Likewise, this issue can be specifically raised in requests for admissions, at depositions, and at trial. By specifically addressing these issues the opposing spouse is more likely to be upfront and also more likely to be sanctioned if it is later discovered they are attempting to hide assets.
If there remains a suspicion of a spouse harboring hidden cryptocurrency, then it should be noted that although Bitcoin and the like are generally pseudonymously held, their purchase and sale do create trails as follows: such currency will generally be purchased using fiat currency (creating a record) and most cryptocurrencies are purchased via an exchange (the largest one at the moment is Coinbase.com), which will charge transaction fees. It is also possible that you could subpoena such exchanges to procure such records.
The IRS has recently issued a summons seeking “a wide variety of records [from Coinbase.com] including…taxpayer identifiers for all of its customers who have bought, sold, sent or received crypto currency worth $20,000 or more in any tax year from 2013 to 2015, transaction logs, and correspondence.” Accordingly, there may be ways to obtain releases and or to subpoena such records to determine the existence of cryptocurrencies. Tracking such assets on tax forms in future years should make it easier to follow the crypto trail in future years. As always, the option to retain forensic accounting or other such experts may be appropriate when in doubt and if it is believed sufficient hidden assets may exist.
Whether cryptocurrencies will be merely a “flash in the pan” or the start of a new way of global commerce, not even our foremost futurists know for sure. That was true when I first wrote my article on cyrptocurrencies and divorce, and it remains true now at the time of this writing in 2024. But in the present moment, there will increasingly be cases where a portion of marital wealth will be held in the “blockchain.” Using innovative discovery techniques to locate such assets will be important now and in the future.
For you the main take-away is this, think long and hard about whether your spouse is or may be utilizing cryptocurrencies and discuss with your attorney how you can address locating and valuing such assets as part of your divorce.
Partner with Carl Taylor, Esq.
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