What Happens to Cryptocurrency Investments During a Divorce?

As cryptocurrency becomes more mainstream, it’s increasingly common to see these digital assets come into play during divorce proceedings. If you or your spouse have invested in Bitcoin, Ethereum, or other cryptocurrencies, you might be wondering how these will be handled in your divorce.

Let’s break down what you need to know about cryptocurrency in the context of divorce.

Cryptocurrency as Marital Property

In New Jersey, cryptocurrency investments made during the marriage are typically considered marital property. This means they’re subject to equitable distribution, just like other assets such as bank accounts or real estate. However, the unique nature of cryptocurrency can complicate the division process.

Equitable distribution doesn’t necessarily mean a 50/50 split. Instead, the court considers various factors to determine a fair division of assets. These factors can include:

• The duration of the marriage
• The age and health of both parties
• The income and earning capacity of each spouse
• The standard of living established during the marriage
• The economic circumstances of each party at the time of division

When it comes to cryptocurrency, additional factors may come into play, such as who made the initial investment and whether marital funds were used.

Disclosure Challenges with Cryptocurrency

One of the first steps in any divorce is full financial disclosure. This includes cryptocurrency holdings. However, the anonymity of crypto transactions can make it tempting for some to try to hide these assets.

At Netsquire, we have methods to uncover undisclosed cryptocurrency investments, including:

1. Forensic accounting: We work with financial experts who specialize in tracing cryptocurrency transactions.
2. Bank statement analysis: Large transfers to cryptocurrency exchanges can be a red flag.
3. Tax return examination: Cryptocurrency sales should be reported for tax purposes.
4. Discovery process: We can request detailed information about cryptocurrency holdings during the legal discovery process.

It’s crucial to remember that attempting to hide assets during a divorce can have serious legal consequences. Courts take a dim view of such actions, and they can result in penalties or an unfavorable division of assets.

Valuation Challenges with Cryptocurrency

Valuing cryptocurrency can be tricky due to its volatility. The value of cryptocurrencies can fluctuate dramatically, even within a single day. This volatility can make it challenging to determine a fair value for division purposes.

To address this, we might use strategies such as:

1. Agreeing on a specific valuation date: This could be the date of separation, the date of filing for divorce, or another mutually agreed-upon date.
2. Using an average value over a set period: This can help account for volatility by smoothing out price fluctuations.
3. Opting for real-time division of the actual cryptocurrency: Instead of trying to determine a cash value, the crypto assets themselves can be divided.

The choice of valuation method can significantly impact the outcome of the asset division, so it’s important to carefully consider the options and their potential consequences.

Options for Dividing Cryptocurrency in Divorce

When it comes to dividing cryptocurrency in divorce, there are several options to consider:

1. Direct transfer of the cryptocurrency: This involves transferring a portion of the crypto assets from one spouse’s digital wallet to the other’s. This method requires cooperation from the spouse who controls the assets and technical knowledge to execute the transfer securely.
2. Selling the cryptocurrency and dividing the proceeds: This approach simplifies the division process by converting the crypto to cash. However, it may have tax implications and could be disadvantageous if both parties believe the value of the cryptocurrency will increase in the future.
3. One spouse keeps the crypto while the other receives assets of equal value: This can be a good option if one spouse is more interested in maintaining the cryptocurrency investment. The other spouse would receive other marital assets of equivalent value.
4. Deferred distribution: In some cases, it might make sense to delay the division of cryptocurrency assets, especially if both parties believe the value will increase. This could involve creating a trust or other legal structure to hold the assets until a future date.

Each option has its pros and cons, and the best choice depends on your specific situation, including your financial goals, risk tolerance, and the overall composition of your marital assets.

Tax Implications of Cryptocurrency Division

It’s crucial to consider the tax consequences of cryptocurrency division. The IRS treats cryptocurrency as property, meaning that selling or transferring it can trigger capital gains taxes. This should be factored into any division agreement to ensure a truly equitable split.

For example, if you and your spouse decide to sell Bitcoin that has appreciated in value since its purchase, you may owe capital gains tax on the profit. This tax liability should be considered when determining how to divide the proceeds.

Additionally, if you receive cryptocurrency as part of your divorce settlement, your cost basis for future tax purposes will generally be the fair market value of the cryptocurrency at the time of transfer.

Given the complicated and evolving nature of cryptocurrency taxation, it’s often advisable to consult with a tax professional in addition to your divorce attorney when dealing with significant crypto assets.

Enforcing Cryptocurrency Asset Division

Unlike traditional assets, cryptocurrency can’t be frozen by a court order. This makes it essential to work with an attorney who understands these challenges and can structure an agreement that protects your interests.

Some strategies for enforcing cryptocurrency division include:

1. Requiring the transfer to occur as part of the divorce proceedings, before the divorce is finalized.
2. Including penalties in the divorce agreement for failure to transfer the agreed-upon amount of cryptocurrency.
3. Using a neutral third party or escrow service to facilitate the transfer.
4. Incorporating detailed instructions for the transfer process in the divorce agreement, including specific wallet addresses and transfer protocols.

The Netsquire Approach to Cryptocurrency in Divorce

At Netsquire, we stay ahead of the curve when it comes to handling cryptocurrency in divorce. We offer:

1. Thorough investigation: We work diligently to uncover all crypto assets, ensuring a complete picture of the marital estate.
2. Strategic planning: We develop a strategy for division that considers tax implications, future value potential, and your individual financial goals.
3. Expert collaboration: When necessary, we work with financial experts and cryptocurrency specialists to ensure accurate valuation and proper division.
4. Clear communication: We ensure you understand how cryptocurrency is treated in divorce proceedings and the potential outcomes of different division strategies.
5. Innovative solutions: We leverage our understanding of both cryptocurrency and divorce law to develop creative solutions that protect your interests.

If you’re facing a divorce involving cryptocurrency, don’t navigate these complex waters alone. The unique challenges posed by cryptocurrency require specialized knowledge and a strategic approach.

At Netsquire, we’re here to help you understand your rights, explore your options, and develop a strategy that protects your interests. Whether you’re the spouse who invested in cryptocurrency or the one seeking a fair share of these digital assets, we have the expertise to guide you through the process.

Contact us today to discuss how we can assist with your cryptocurrency-related divorce matters. Let’s work together to ensure a fair and comprehensive resolution to your divorce, including all your digital assets.