The past few years have marked a massive shift in the evolution of cryptocurrencies. There is money to be made, money to be lost, and, for some, money to hide. Those at the more novice level have been watching the rise and fall of Ethereum, Bitcoin, and Doge and enjoying the accompanying excitement.
Cryptocurrency clearly falls within the definition of marital property, which generally includes all assets acquired during the marriage. Therefore, as family law attorneys, it is critical that we understand what cryptocurrency is, how to find and value it, and how to address crypto-related issues in a divorce. Crypto is an asset divorce attorneys cannot ignore and must address in discovery, counseling clients, mediation, settlements, or at trial and divide, offset, or equalize in some format.
WHAT IS CRYPTOCURRENCY?
By definition, cryptocurrency is a digital currency in which transactions are verified and records are maintained by a decentralized system.1 Unlike government-backed currency, there is no central authority (such as the U.S. Department of the Treasury for the U.S. dollar) that manages and maintains its value.2 Notable cryptocurrencies include Bitcoin, Ethereum, Doge, and Shiba. There are believed to be approximately 4,000 types of cryptocurrencies available. Bitcoin is by far the most popular and well known with more than 19 million Bitcoins in circulation as of May 2022.3
Cryptocurrency is designed to be exchanged through a computer network, not relying on a government or bank to verify that its value exists.4 The main difference between cryptocurrency and traditional money is that no one controls the cryptocurrency, and no one can govern how and when an individual makes transactions. A bank or a credit card processor has the authority to decide whether your money can be sent, and to whom. Traditional money is also backed by the government, and the value can ebb or flow based on a political or economic situation.5
Cryptocurrency can be purchased online at one of the more popular websites such as Coinbase, Robinhood, or Exodus.6 It can also be purchased or traded offline. Cryptocurrency can be held online or through an app, it can be held in storage such as on a hard drive or flash drive (typically called a cold wallet), and it can be held even in a paper wallet, though they are generally considered obsolete.7
Cryptocurrency can be traded for cash, tangible goods, or other crypto. Some crypto can be used to purchase or acquire tangible goods, cashed in, or used for services. Microsoft, Overstock, and even the National Basketball Association’s Dallas Mavericks accept Bitcoin as a form of payment.8 However, the best-known cryptocurrencies like Bitcoin and Ethereum are frequently used as an investment option similar to stocks or gold.9
First of all, if you are not asking your client about their crypto and online currency, you are missing a potentially significant asset. Second, if you are not asking about crypto in your discovery or verified financials, then you may miss including a potentially incredibly valuable asset of the marital estate.
How do we find this potentially valuable asset? Cryptocurrency is, for some, a new way to hide assets from one’s spouse in a divorce. Think of it as the new offshore account. Whether it is inadvertent or intentional failure to disclose, it is critical that divorce attorneys obtain discovery about this asset.
The first place to start is using Michigan’s Domestic Relations Verified Financial Information Form,10 which is required in all divorce cases unless an exclusion applies.11 The “miscellaneous” section of this form includes one line about online or cryptocurrency, specifically stating:
Are there any other items you own that have financial value such as electronic assets, season tickets, or electronic currency such as bitcoin? ... If yes, describe asset, where it is held and its current value as of a specific date[.]”
Arguably, there are ample opportunities to disclose cryptocurrency under the financial accounts section of the disclosure form as well as in response to the catch-all question asking for “any other financial information of any kind” on the form.
Another way to locate cryptocurrency is reviewing your client’s bank statements. You should review these statements for transactions that indicate transfers to online trading platforms as well as through cash apps such as PayPal and Venmo. Your client should also search the family’s financial records, looking for a string of numbers, letters, or symbols that may make no sense at first glance. Cryptocurrency should be reported on tax returns — although not everyone does — so it is worth reviewing prior returns to determine whether there have been transactions in previous years.
Starting in 2020, the IRS began calling attention to cryptocurrency and added this question to the digital assets section at the top of form 1040: “At any time during the year did you receive, sell, send, exchange or otherwise acquire any financial interest in virtual currency?”12 The IRS does not recognize cryptocurrency as currency but as property, meaning that the capital gains and losses should be reported on tax returns.
Many online institutions such as Robinhood and Coinbase will typically respond to subpoenas, which may be wise to use in order to determine the extent of the actual holdings. A forensic evaluation of computers or external hard drives or storages may help in locating cryptocurrency. And, of course, as in other complex litigation matters, it may be wise to consult with a financial expert such as a forensic accountant if there is a sincere concern about determining the extent and nature of the cryptocurrency.
Keep in mind, some forms of cryptocurrency require a digital key that only the user has and if it is lost, it can never be reset, replicated, or accessed in any other format.13 Imagine this in a divorce: someone discloses the crypto but claims that they lost the key or code and, therefore, it can never be accessed. Take, for example, the story of James Howells, a man from Wales who trashed an old hard drive in a spring-cleaning effort — not realizing that it held 8,000 bitcoins.14 As of early December, that hard drive was worth approximately $136 million.15 Although he’s unlikely to find it, Howells has proposed a plan to search the landfill where the drive is believed to be buried at a cost of $11 million.16
Or consider the following scenario: Concerned about the impact of the COVID-19 pandemic, a husband cashed out one of his retirement accounts in 2020 and purchased crypto from a variety of different sources — some through a Robinhood account and more through mining, for which he receives a code, writes on a piece of paper, and puts in his desk drawer. The husband and his wife file for divorce in 2022 and while the husband discloses on his verified financial form a Robinhood account worth $12,500, he claims that he cannot locate the piece of paper — and even blames his wife for taking it when she obtained tax records from his home office. There is no description of what is held at Robinhood, what the account is composed of in terms of crypto, or the date of valuation.
As a savvy divorce attorney, you will want to ensure that you receive all account statements and information. The good news is that Robinhood not only provides regular statements, but it will usually respond to a subpoena. Do not rely on a snapshot or screenshot of the account. Determine the type of crypto that is held so your financial expert and your client can decide whether they wish to receive their share of the actual account holdings or accept a payment in another format either with a settlement or an offset from other assets. This leaves the written code that is missing in action. This author would suggest that the parties agree that if the missing code is ever located, they will divide the holdings equally with strong language about timing of locating and sharing the information.
HOW DO WE VALUE CRYPTO?
Once the crypto has been located, an issue arises with value. Even more turbulent than our current stock market, crypto can rise 1,000% over the span of a single night and drop just as quickly. Does your client want to take that risk or do they want to cash out or be made whole with other assets? Consulting with a savvy financial advisor is always a good idea, but the risk is uncertain. Consider this: in 2009, Bitcoin opened to the public at $0 per unit. By 2010, it was 9 cents per unit. It peaked on Nov. 10, 2021, at $68,789 per unit.17 When this article was written, Bitcoin was valued at just under $17,000 per unit. The risks associated with dividing cryptocurrency must be contemplated with your client and a financial expert when addressing this asset type in a divorce.
While it may seem daunting at first, cryptocurrency is really not much different from any other investment or asset being divided. The client must consider the risk associated with cryptocurrency and whether they would prefer to be compensated in the form of a division of the crypto itself, a cash payment, or offsets with other assets. If the crypto is cashed in, depending on the platform, it can result in a taxable event which should also be considered in the financial settlement. Some platforms do not permit the transfer of the crypto to another user, only to a bank or investment account; others can be transferred via email. The other assets and income the client may have post-divorce should also be considered when deciding whether to continue to own the cryptocurrency.