Dividing Cryptocurrency in Divorce
By Paul Sibenik
Although most people don’t own cryptocurrency assets such as Bitcoin, it’s becoming far more common than it was just a few years ago.
Bitcoin and other cryptocurrencies do need to be properly reported as assets when going through a divorce in almost all jurisdictions. While cryptocurrencies may be classified differently depending on your jurisdiction, owning cryptocurrency most definitely has implications when going through a divorce.
What is Cryptocurrency?
A cryptocurrency is a type of digital asset that uses highly secure cryptography and allows users to freely transfer value between each other. There is no central governing authority such as a central bank; they are decentralized in nature.
Cryptocurrencies ascribe to act as a medium-of-exchange and are effectively governing by computer code which cannot be changed by any single party. Its decentralized governance, along with encryption techniques utilized, control the generation of currency supply and verifies the transfer of funds.
Declaring Cryptocurrency in a Divorce
The way in which you declare your cryptocurrency assets in a divorce may differ depending on your jurisdiction. In the United States, cryptocurrency is generally treated as intangible property, while in Canada it’s generally treated as a commodity.
Valuing Cryptocurrency Assets
As part of the proceedings, you may be required to calculate the Fair Market Value of your Cryptocurrency. But this is where things can get a bit dicey. Bitcoin is an extremely volatile asset and the value is almost certainly going to change considerably between the value of the cryptocurrency at the time of the calculation, the value of the cryptocurrency at the time of a settlement or ruling, and the value of the cryptocurrency when the actual distribution of assets happens.
For example, a vehicle worth $20,000 might reasonably be reported as property worth $20,000 since its value isn’t likely to depreciate much in the few months that follow. If parties are aiming for a 50/50 division of assets, this could mean the party that owns the vehicle owes the other party $10,000 or equivalent, not accounting for other assets.
But $20,000 worth of cryptocurrency could easily appreciate to $200,000 in a few months time or could depreciate to $2,000. Would it really be fair for the owner of the cryptocurrency to pay $10,000 in either of these hypothetical instances? Most people would probably agree that it probably wouldn’t be fair to either party. Owing the other party $10,000 when they only have $2,000 of an asset is absurd.
Therefore, it’s very important to discuss with your divorce lawyer a fair way of valuing the asset which could hold up in court if need be.
Fairly Accounting for Volatility When Dividing Cryptocurrency
We’ve established that any value associated with cryptocurrency can’t realistically be expected to be honored over time due to volatility. The alternative option would be to avoid pegging or expressing a value of the cryptocurrency at that time, and instead agree that the value of the cryptocurrency would be based on the value at the time of distribution.
Therefore, if a party owns 3.5 Bitcoin and 44 Ethereum, they would owe the other party 1.75 Bitcoin and 22 Ethereum at the time of the disbursement, regardless of how low or how high its value is. But transferring this Bitcoin and Ethereum may not be as simple as it sounds.
There are effectively four ways to transfer this value to another party:
- The party that owns the cryptocurrency would transfer the applicable cryptocurrency from their cryptocurrency wallet to the other party’s wallet, regardless of the applicable value. The problem with this solution is that it requires some level of technical competency with regards to cryptocurrency on the part of the recipient as well. And they may not understand or feel comfortable setting up their wallets or receiving such transactions safely and securely.
- The second way to transfer value would be to find a suitable custodian who is comfortable transacting in cryptocurrency and holding funds in cryptocurrency on behalf of the recipient. Once funds are received, the custodian would likely be tasked with liquidating the cryptocurrency for local fiat currency then transferring local currency to the recipient. The problem with this option is that the recipient would incur some fees from the custodian for their services, likely somewhere from 5% to 25% of the value.
- The third way would be for the cryptocurrency owner to liquidate the appropriate amount of cryptocurrency themselves when the distribution is due to occur and then immediately transfer the liquidated value in local fiat currency to the spouse.
- All three of the above models incur risk on the part of the recipient, and they may not be comfortable with that risk given that cryptocurrency is likely to be an asset class they have little to no understanding of. A fourth model would involve the owner of the cryptocurrency liquidating half (or the applicable amount) of their holdings and both parties would need to agree (in advance) that the other party is entitled to 100% of the liquidated portion, while agreeing they are not entitled to any of the remaining cryptocurrency holdings at all, regardless of what happens to the price.
This is fair for both parties because the cryptocurrency owner has already liquidated the ‘half’ their spouse is entitled to. If the cryptocurrency owner liquidated $10,000 on behalf of the spouse and kept the remaining $10,000 for him or herself, they are taking on the risk themselves with their portion and the spouse ought not to have a claim to it provided they have made such an arrangement in advance.
If you find yourself in this situation whereby either you or your spouse own cryptocurrency assets, you should discuss with your lawyer regarding how to proceed. It may be the case that not all these options will be available to you in your jurisdiction due to local laws. But what is clear is that it’s not to either party to peg its price to local fiat currency at a fixed rate and expect that rate to be honored in the future. If there’s a liability for cryptocurrency, it needs to be at the applicable ‘live’ rate, never an ‘old’ rate.
Non-Disclosed Cryptocurrency Assets
Besides volatility, the other major problem cryptocurrency presents in divorce cases is its pseudonymity. This can allow one party to obscure or hide wealth in cryptocurrency and has become a rising issue in divorce cases. A small portion of individuals do elect to hide wealth in cryptocurrency assets for a variety of reasons, including occasionally, a particularly bitter divorce.
While some people associate cryptocurrency with being impossible or very difficult to track, that’s really not a fair statement to make since cryptocurrency is traceable in most cases. Its transparency, combined with the right tools, knowledge, and skills can be utilized to find and discover undeclared assets through blockchain forensics.
While cases are sparse, the implications of a party knowingly concealing cryptocurrency assets during divorce proceedings can be severe, just as with other assets like hidden overseas bank accounts. It’s important to consult with an experienced lawyer if you find yourself in this situation. In all likelihood, your lawyer will not be all that experienced when it comes to cryptocurrency so if you’re not comfortable tracking cryptocurrency yourself, you may want to consult with a professional that specializes in cryptocurrency forensics or a forensic accountant that can.
Note: Nothing in this article is to be construed as legal, financial, or tax advice.
Paul Sibenik is the owner of CryptForensic Investigators in Vancouver, Canada. His firm focuses on tracking and assisting in the recovery of cryptocurrency assets for family law matters including divorce and child support.