- November 17, 2021
File Under: Divorce
Divorce and Cryptocurrency
Cryptocurrency has gone from an obscure hobby to a significant investment for many people in New Jersey and across the country. As crypto assets like bitcoin and ethereum rise dramatically in price, many investors have become wealthy, especially those who entered the crypto market in the early days. However, cryptocurrency can also add new complications to a divorce, particularly when it comes to dividing assets between divorcing spouses.
How Is Cryptocurrency Treated in a Divorce?
Cryptocurrency is an asset like any other kind of asset, and, as a result, it may be considered separate property or marital property. As New Jersey is an equitable division state, cryptocurrency is subject to equitable division alongside all other marital assets. In some cases, growth in the value of cryptocurrency during the marriage may be considered a marital asset, even if the original purchase took place before the marriage. This is especially true when both spouses were involved in using cryptocurrency, investing in crypto assets, or planning to rely on crypto to fund future financial ventures. Crypto investors considering divorce may consult with a family lawyer about how they can expect their investments to be affected by the separation.
Today, over 20 million Americans own cryptocurrency, and the number grows on a daily basis. Market values of digital currencies reached $2 trillion in April. While most people have small crypto holdings, others may own millions of dollars in bitcoin, ethereum, or other crypto assets.
A cryptocurrency wallet, then, is no different than a bank account, retirement fund, or traditional investment account with stock and bond securities when it comes to New Jersey property division. Of course, like other assets, crypto holdings can be handled in different ways during asset division. They could be liquidated and their cash value divided, divided into both spouses’ crypto wallets, or one spouse may forgo a share in cryptocurrency holdings in exchange for a larger share of other types of NJ marital property.
However, there can be some complexity associated with cryptocurrency assets in a divorce. The price of cryptocurrency is often highly volatile, even if the best-known crypto options like bitcoin and ethereum retain high values. This means that both parties’ divorce lawyers may need to negotiate an agreement that the value of the crypto assets can be reevaluated before the asset division is final. A sudden crash or spike in the value of crypto before a divorce is finalized could lead to inequitable outcomes.
Of course, cryptocurrencies can also come with tax obligations. While many crypto exchanges are well-documented and report their transactions to the IRS, others may not. Previous unpaid taxes or other concerns may come to the forefront during a divorce. Spouses concerned about how these issues could affect their financial future may seek advice from their divorce attorney about how best to address potential problems.
Hiding Assets With Cryptocurrency
Another concern has arisen in divorces where cryptocurrency is an issue. This is especially true when only one partner is involved in the crypto market while the other spouse has little knowledge or understanding of the financial and technical aspects of crypto investments. This information gap can lead to one partner not knowing exactly what to look for when it comes to uncovering crypto holdings in the asset division process.
During a divorce, each partner works with their family law attorney to present a full picture of their separate and marital assets and liabilities. This is the first step toward negotiating a marital settlement agreement. However, some people may wish to keep assets out of the divorce by hiding them from their spouse or even their own divorce lawyer. Cryptocurrency, due to its anonymity, can be one option for people seeking to hide marital assets from the property division process.
While this has been a long-term concern for early investors in crypto, the growing awareness of cryptocurrency technology has led to more divorce attorneys thinking about how to deal with crypto as a way of hiding assets. In some cases, a spouse may suspect the other party has undisclosed crypto holdings because they previously discussed investing in the crypto market, while in other cases, they may notice that the other spouse suddenly seems to have a source of funds that do not seem tied to their existing employment or investments.
How Hidden Crypto Assets Are Discovered
Both parties in a New Jersey divorce are required to present an honest accounting of their marital assets. If one spouse is suspected of hiding assets, the other party’s family lawyer may seek a court order to reveal their computer records or any accounts with major cryptocurrency wallet providers. Of course, family court judges will not allow a fishing expedition, so there typically must be some type of evidence or reasonable suspicion in order to obtain a subpoena.
There are several ways that cryptocurrency assets may be discovered. In many cases, the best-known cryptocurrencies are often the easiest to uncover, such as bitcoin and ethereum. Other cryptocurrencies may offer higher levels of anonymity; however, in many cases, those assets are much less valuable and more volatile than the better-known and more expensive digital currencies.
A forensic expert brought in by the parties may search for cryptocurrency tickers, login credentials for exchanges, or keys for certain types of digital wallets. Bank statements, credit card statements, and other financial documents may indicate transactions for crypto purchases from various exchanges. Some exchanges might send confirmation emails or other documentation. In addition, some people may have documented their own crypto income in the past for tax returns, loan applications, or other documents.
In many cases, U.S.-based accounts are easier to track; exchanges in the United States may be subpoenaed directly. However, cryptocurrency is a global marketplace, and many foreign exchanges may be less concerned about requests for information from a New Jersey family court.
Weighing the Costs of an Investigation
The costs associated with uncovering hidden cryptocurrency assets can also be substantial. Forensic experts may be costly. Before moving forward with a court order to uncover potential hidden crypto assets, a spouse and their divorce lawyers may want to make sure that they are relatively certain about the outcome. The amount of money involved is also a consideration. People with a few hundred or even a few thousand dollars in undisclosed cryptocurrency are rarely the proper target of such an investigation.
On the other hand, some people may have hundreds of thousands or millions of dollars in cryptocurrency that they are attempting to hide. In this case, uncovering hidden cryptocurrency and exposing the other party’s dishonesty before the court might be very significant for both parties’ financial future. A family law attorney may help a spouse concerned about crypto assets decide whether or how to pursue a court order and full forensic investigation.
Concerns about cryptocurrency also point to the importance of financial knowledge in a marriage and when preparing for divorce. During a marriage, both partners should have an understanding of their marital income, investments, and choices. With greater knowledge shared between spouses, it can be far more difficult for one person to hide assets during a divorce. Understanding the family wealth can also point to missing money, which could be hidden in a crypto wallet or in other types of difficult-to-discover assets, such as an offshore bank account.
If you are concerned about how your or your spouse’s cryptocurrency assets could affect your divorce or the asset division process, a family lawyer may provide advice and guidance. Contact the experienced New Jersey divorce lawyers at Lawrence Law by calling 908-645-1000 or using our convenient, easy online form for a consultation about divorce negotiations at our Red Bank or Watchung, New Jersey, office.