Pittsburgh Family Law Mediation Julie focuses her practice on family law matters including divorce, child custody, support, asset division, prenuptial agreements, and international custody. Julie also has experience in family law...Read More by Author
Five Tips for Dealing with Cryptocurrency in Your Divorce
Do you or your spouse have cryptocurrency? Did it exist during the marriage? Do you know how the cryptocurrency will be addressed in your divorce? Is it income? Is it an asset?
If you or your spouse own cryptocurrency, you are going to want to make sure it is discussed with your divorce lawyer. It may be a marital asset that needs to be valued and divided. It will need to be valued and cryptocurrency fluctuates wildly. The fact that cryptocurrency is hard to track can complicate a divorce for both the owner and non-owner spouse.
Ownership of cryptocurrency doesn’t have to be nefarious, but it can be. Some people prefer to use cryptocurrency for online purchases to ensure secure financial transactions. Cryptocurrency might be an investment. Some people use it simply to capitalize on discounts or rewards offered for the use of digital currencies.
The most popular form of cryptocurrency is Bitcoin. Some examples of other digital currencies are Litecoin, Ethereum, Ripple, Zcash, Bitcoin Cash, and Cardano.
Digital currency is bought, sold, and traded on various platforms. Coinbase is a popular platform used for Bitcoin. Some other digital currency exchange platforms are Kraken, BitStamp, ShapeShifit, Gemini, and Bisq.
Cryptocurrencies are validated by a blockchain. This refers to a list of records called blocks that are linked together like a chain. Blockchains are designed to be secure. The foundation of a blockchain is a “decentralized database.” Blockchains can include a piece of information called a hash.
It is crucial to know if any parties in a family law matter have cryptocurrency. Cryptocurrency can be a marital asset eligible for division in a divorce. If you know cryptocurrency exists, it will need to be valued. Cryptocurrency has an exchange rate just like standard currency and it can be converted into U.S. dollars. There are programs on the internet that can assist with the conversion of cryptocurrency to dollars. It may be helpful to know which conversion rate program that cryptocurrency owner utilizes.
1. Do NOT Delete Anything About the Cryptocurrency
If you have proof of cryptocurrency do not delete it. Also, do not close any cryptocurrency accounts. It is important to preserve all potential evidence in a divorce. If you delete things or close accounts when a divorce is pending there could be consequences for those actions. One of the potential consequences is that a judge could presume the destruction of the evidence or closing of the account was for a negative purpose. You could lose the ability to argue against considering the action to be negative.
2. Looking for Cryptocurrency
Figuring out whether or not cryptocurrency exists is important. You are the person with the most information for your lawyer. Have you discussed cryptocurrency with your spouse? Will bank account statements or credit card statements show deposits or withdraws from a digital currency platform? Are there emails or other correspondence that contain information about cryptocurrency? Do you know that cryptocurrency exists?
If any of these are true in your marriage or divorce, tell your attorney immediately. Your attorney will need to start collecting information about the cryptocurrency.
3. Finding Evidence of Cryptocurrency
Obtaining documentation about cryptocurrency can be tricky. Often the point of cryptocurrency is for the transactions to remain private or secure.
First, it needs to be determined if the cryptocurrency owner has a wallet and whether that wallet is online or is a physical device. The wallet will have an ID and a password for logging which can be requested in discovery. Wallets can be similar to a portable hard drive and be an actual physical item. In other instances, the wallet may just be online and through one of the cryptocurrency exchange platforms. Different steps need to be taken to preserve information from both kinds of wallets.
An owner can usually download a transaction history from his/her wallet or exchange platform. The transaction history is often downloaded as an Excel spreadsheet or other electronic document. The download contains information like a bank statement such as date, time, amount of cryptocurrency, conversion rate, balance, transaction ID, and hash information.
Most transactions are confirmed somehow. Often the confirmation occurs via email and serves as a receipt. The confirmation may include the conversion rate, dollar amount, and a date and timestamp. In some instances, the confirmation may identify where the cryptocurrency user deposited the funds after sale or where they withdrew the funds from to make a purchase. This can help identify other assets as well.
4. Consider How Cryptocurrency Will Effect Tax Filing
A person may or may not receive tax documents about his/her cryptocurrency accounts. Whether or not a person receives tax documentation depends on if the person’s account hits certain parameters specified by the exchange being used. If they meet the parameters, then tax documents will be issued.
In 2014 the Internal Revenue Service issued Notice 2014-21 which stated virtual currency was to be treated as property for tax purposes and therefore it was subject to capital gains taxes. Last year, the IRS began sending letters to taxpayers with virtual currency transactions that may have failed to pay the appropriate taxes. The tax consequences should be considered when transferring and valuing assets in a divorce. It may also be relevant when determining taxes in a support case.
The existence of cryptocurrency may affect your tax return and should be discussed with your lawyer. It may also effect past tax years which could complicate the divorce.
5. Transferring Cryptocurrency
If there is to be a transfer of virtual currency as part of a divorce, the person who is new to virtual currency should make sure they are fully informed before accepting the currency. Does the person know how to access and use the virtual currency? Are there any tax liabilities or potential tax liabilities from the funds transferred? If a buyout is to occur, it may make sense to specify the amount of cryptocurrency that equals the buyout. For example, the distribution might specify that one spouse is to receive the equivalent of a specific number of bitcoin with proof of the conversation rate and time of conversion to be provided simultaneously with the buyout funds. This would help to prevent the risk of either spouse obtaining a windfall based on the market fluctuation between the time of agreement and the conversion to US Dollars.
Virtual currency can hold real value. It is important to make sure that it is properly discovered and valued in family law matters. If you know (or suspect) that cryptocurrency will be a part of your divorce, talk to your lawyer immediately and put together a game plan for dealing with it. This may include a plan for how to explain how cryptocurrency works with other parties or professionals in your case.
The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.