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What Happens to Cryptocurrency Assets in a Divorce?

Legal Assistant Divorce Law, Family Law, Resources

If you know a thing or two about divorce, you know that the division of assets and liabilities is integral to the entire process. You may not understand how complicated things can get when you add cryptocurrency into the mix.

With the popularity and value of crypto assets growing with each passing day, they are becoming increasingly common in marital assets. These also need to be valued and divided between the divorcing parties. Unfortunately, it is easier said than done.

With no concrete legal framework on how crypto is to be treated in a divorce and little knowledge on how to track it, value it, and divide, savvy investors are using it as a means for hiding money in a divorce.

What happens to cryptocurrency assets in a divorce? Here’s everything you need to know.

Division of Property in a Divorce

No one ever gets married believing that at some point down the line, they’d be sitting in an arbitration room with a court-appointed mediator, discussing the division of their marital assets. The process involves making some tough calls, particularly regarding the division of assets, debts, and properties. When dividing assets in divorce, three factors come into play:

  1. The state you live in
  2. The kind of property you own
  3. The type of divorce you seek

1. The State You Live In

Courts treat marital property in one of two ways depending on the state you reside in. Debts and assets are divided based on the same principles.

  • Equitable distribution states: In some states, all property, assets, earnings, and liabilities acquired during the marriage are divided equitably between both parties. “Equitably” is not to be confused with “fairly.”
  • Community property states: In other states, all marital property, assets, and debts are classified as either community property or separate property. Generally, each spouse gets to keep their separate property, whereas community property is divided equally between both parties.

2. The Kind of Property You Own

Who gets the house? The answer to this age-old question depends on whether you reside in a community property state or a separate property state. As mentioned before, community property refers to assets acquired during the marriage. On the other hand, separate property refers to earnings, assets, property, gifts, and anything else that each spouse acquired before the marriage.

If you live in a community property state and perhaps live in a house purchased using a combination of separate and community funds is generally considered community property.

3. The Type of Divorce You Seek

Most people hardly ever give a second thought to the kind of divorce they want to have. If you’re willing to work together with your estranged spouse, an uncontested divorce would be the least expensive route to take. It generally involved both parties agreeing to all the terms of the divorce, including property division, without going through a formal trial.

A contested divorce is the stereotypical scenario that comes to mind when you think of divorce. It happens in cases where there’s a lot of disagreement where matters involving property division, spousal support, and child custody issues are concerned.

Somewhere in the middle of the spectrum are divorces that involve mediation, arbitration, and other collaborative alternatives that allow each spouse to get independent legal representation without having to go through the costly process of a full-blown trial.

Divorce Disclosure of Assets

In a divorce, each spouse is legally required to disclose all their property, assets, earnings, and debt in the financial disclosure phase of the divorce proceedings. It is an important part of the process since it is what would be used in the division of assets and the determination of child and spousal support.

More often than not, most spouses will usually comply with these requirements. Unfortunately, some individuals aren’t as forthcoming, particularly where cryptocurrency tokens, NFTs, and other digital assets are involved. It is not unusual to hear cases of a husband selling crypto assets before divorce and hiding the proceeds from the financial disclosure.

When one of the parties in the divorce fails to disclose the full value of the assets they hold, they are in violation of fiduciary duty and will essentially have lied under oath. The penalty for lying under oath varies by state and by case and may include monetary fines, prison time, and probation.

On the other hand, the penalty for hiding assets in divorce may include monetary or perjury charges. In most cases, if you’re found to be hiding assets in a divorce, you’ll likely end up losing more than half the value of the hidden asset as well as being responsible for your spouse’s legal fees and expenses incurred since you’ll be in breach of fiduciary duty.

Cryptocurrency and Divorce

man women pulling bitcoin

The Bitcoin nightmare for divorce lawyers isn’t going anywhere any time soon. Crypto assets are, by design, difficult to trace, which is what makes them so problematic. Cryptocurrency is essentially a specific type of software or code that determines the way in which each currency unit is created and regulated.

All crypto transactions are recorded on a public ledger known as a blockchain and can be tracked using a special address known as a “public key.” The crypto asset owner has a unique password referred to as a “private key,” which allows them to buy, sell, and trade crypto units on the blockchain. The private key is stored in the owner’s virtual “wallet.”

Here’s why crypto is a major pain point for divorce attorneys.

Unless you know an individual’s private key, it is impossible to trace cryptocurrency transactions back to the owner. For a lawyer to confirm whether or not someone holds crypto assets, the private key would need to be disclosed.

Once the private key is obtained, all transactions on the blockchain that are related to that particular key can be traced back to the owner. The crypto assets will then be valued and divided between both parties based on the marital property laws in your state.

While it is difficult to get the crypto owner to disclose whether or not they’re holding crypto assets, it is possible to do it through a subpoena to compel them to share the information.

Enforcing Divorce Settlement

To enforce a marital settlement agreement, you’ll need to file a motion with the court, showing that your ex-spouse has failed to comply with the settlement terms. If that’s the case, you can petition the court to help you enforce your agreement.

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