The Legal Challenges of Dividing Cryptocurrency in a Divorce

Just a few short decades ago, divorcing couples only had to worry about dividing assets such as marital homes, cars, and bank accounts. With the introduction of cryptocurrency, splitting assets in a divorce has become a whole new ball game. That’s because crypto is fully digital, anonymous, and easy to hide.

If you’re separating from your spouse, it’s smart to know what to expect when dividing cryptocurrency in divorce. Below, you’ll learn about the challenges you may face with this asset, plus what to do if you think your spouse might be hiding crypto from you. If you need legal advice, we invite you to call our divorce lawyers in Phoenix, AZ.

Cryptocurrency Demystified

To understand why dividing cryptocurrency in divorce is often a challenge, it’s helpful to know how this digital asset works. Think of cryptocurrencies as digital coins that have no intrinsic value besides what buyers are willing to pay. The value of crypto can change rapidly, sometimes daily.

Crypto is traded electronically and anonymously over the internet network. Suppose Jim wants to send crypto to his friend Tammy. He sends an electronic message with information about the transaction into the network, where it sits with other crypto transactions until they are compiled into a block.

Once the transactions form a block, a cryptographic code enters the blockchain. Upon completion of the transaction, the crypto makes its way to Tammy’s wallet.

As you can see, trading crypto is more complicated than buying something with cash or a credit card at the grocery store. This is part of why dividing cryptocurrency in divorce can be such a challenge.

How Arizona Courts Handle Cryptocurrency Division

Arizona considers cryptocurrency to be a liquid asset, and divorcing couples must divide crypto as they would any other asset. Some states use the equitable division method to split cryptocurrency, which means that each spouse will end up with a fair but not necessarily equal share. However, Arizona is a community property state which means that assets, including crypto, are usually split equally between spouses.

All assets accrued during the marriage are subject to division. Generally, crypto purchased before the marriage or after filing for legal separation or divorce isn’t subject to division. However, spouses may still agree to split assets bought before the marriage or after filing for divorce if they choose.

For example, suppose you purchased Bitcoin before the marriage and it’s now worth a significant sum. You file for divorce and decide you want to keep the marital home. You might agree to give up some of your cryptocurrency in exchange for the home.

The Challenges of Dividing Cryptocurrency in Divorce

Dividing cryptocurrency in a divorce is not as straightforward as splitting other types of assets. We will explore the reasons why that is below.

Cryptocurrency Is Easy To Hide

Crypto is a completely virtual asset, and it’s difficult to find traces of its existence unless one knows where and how to look. Many unscrupulous spouses take advantage of this by shifting crypto between various wallets or even storing cryptocurrency transactions on removable hard drives.

Although the crypto blockchain is a public ledger, which means anyone can view it, some kinds of crypto feature built-in privacy tokens and operate on their own private blockchains. These coins hide all transaction details, as well as the name of the sender, making it nearly impossible to trace them.

There may be ways to uncover hidden crypto with the help of an experienced private investigator or attorney. If the crypto holder uses a trading platform such as Coinbase, the investigator is in luck because these platforms keep records of every transaction.

Failing that, the investigator will have to subpoena the spouse’s device and look for a wallet address to perform a blockchain analysis.

Spouses May Commingle Cryptocurrency With Marital Assets

Imagine that you purchased some crypto before you married your spouse. Originally, you kept the crypto separate from marital funds, but then you needed money to pay the bills or buy a house. As a result, you sold some of the crypto and put that money into a shared bank account.

By doing this, you’ve opened up a can of worms. Had you not commingled the money, it would have been yours to keep. But because Arizona follows community property rules, you’ve effectively turned your crypto into a marital asset subject to division.

Cryptocurrency’s Valuation Changes Rapidly

One reason why crypto is so popular is that it’s an investment that can yield impressive returns. For example, if you purchased $100 worth of Bitcoin 10 years ago when coins cost a mere 10 cents each, that investment would be worth nearly $50 million today.

To determine crypto’s value for divorce proceedings, forensic accountants look at the original purchase price and track changes to the value over time. This is easier if the buyer holds the crypto in an investment account.

You or Your Spouse May Owe Taxes on Crypto Transactions

Although crypto isn’t currently regulated by any central banking authority, the IRS still wants its fair share. When a crypto holder sells or transfers coins, they will have either capital gains or a loss, both of which they must report to the IRS.

This can create a situation in which divorcing spouses argue over who is responsible for paying taxes when dividing cryptocurrency in divorce. You’ll need to hire an attorney who has plenty of experience with cryptocurrency and divorce to sort out the dispute.

Signs That Your Spouse May Be Hiding Crypto or Other Assets

D you think your spouse might be stashing crypto on the sly? You may not be a forensic accountant, but there are still several clues you can look for to help you know if they’re up to something nefarious.

• Your spouse makes large purchases online that don’t show up on their financial records.
• They’re unusually secretive about what they’re doing online. They may lock their computer or phone with a password and refuse to tell you what it is.
• Your spouse discloses assets on their taxes that don’t match their earnings.
• You find a file with a random 256-character number on their computer. This is the length of private keys used to access cryptocurrency wallets.
• Your spouse frequently meets with financial advisors but won’t let you join the meetings and refuses to tell you what they’re about.

Penalties for Hiding Assets in an Arizona Divorce

In Arizona, like all other states, it’s against the law to hide crypto ownership during divorce proceedings. If caught, penalties include:

• The court may choose to give the entire value of the asset to the other spouse.
• The spouse may have to pay fines and penalties.
• They may have to pay the other spouse’s attorney fees.
• In serious cases, hiding a significant amount of crypto could lead to criminal charges, including jail time.

Arizona courts may also use a spouse’s decision to hide assets against them when making child custody and support decisions. The court may grant the aggrieved spouse more custody, for example.

What To Do if You Believe Your Spouse Is Hiding Cryptocurrency

If you think your spouse might be hiding crypto, it’s important to act fast. If you fail to do so, your spouse could take steps to make their crypto even harder to find. Here’s what to do:

• Hire a lawyer who has experience handling divorces involving crypto, such as our attorneys at Lincoln & Wenk, PLLC. Your attorney will guide you through your next steps.
• Document any suspicious actions your spouse takes, such as making unusual online transactions and refusing to tell you where the money went. Any evidence you can collect will help your lawyer build a stronger case.
• Hire a forensic account to help you track down hidden crypto and other assets. Your attorney may be able to recommend a good forensic accountant to you.
• Have your attorney file a motion with the court to assist with finding hidden assets. By doing this, they may be able to subpoena cryptocurrency exchanges, which would require them to disclose your spouse’s transactions.

If your lawyer is able to prove that your spouse hid crypto, they will help you seek reparations for non-disclosure.

Count on Lincoln & Wenk, PLLC, To Help You Track Down Assets in a Contested Divorce

If you are looking for the right attorney to guide you through your divorce, look no further than Lincoln & Wenk, PLLC. Here is why we should be your first choice in law firms:

• We have years of experience serving clients whose spouses have hidden assets and helping them achieve their fair share.
• We know that no two divorces are alike, which is why we offer personalized advice and service for every client.
• Our award-winning firm is proud of our A+ Better Business Bureau rating, which demonstrates our commitment to excellent service.

Our attorneys deeply understand the challenges of dividing cryptocurrency in divorce and will fight hard to uncover hidden assets for you. We also can help you use cryptocurrency in estate planning. For a consultation, contact Lincoln & Wenk, PLLC at (623) 294-2464.