How the Rise of Cryptocurrency Impacts Divorce Settlements

Divorce almost always presents emotional and financial challenges, but the issues that arise when some (or all) of the assets that need to be equitably distributed include cryptocurrency are unique.

Though Bitcoin, Ethereum, and others have become increasingly popular, their decentralized and often untraceable nature have made their identification, valuation, and division particularly complex.

Unlike traditional financial assets, cryptocurrencies are not held in a conventional bank account, and their prices are highly volatile. Their values can fluctuate dramatically within hours, which means that the value assigned to them during the divorce proceedings may no longer be accurate by the time of settlement. Additionally, the method by which cryptocurrency is valued can vary depending on whether the accountant chooses to use its spot price, an average over time, or some other metric. Reaching an agreement on fair valuation can be complicated, especially in situations that are already adversarial.  

Making things even more difficult, cryptocurrencies are often spread across multiple wallets or exchanges. Some may be stored offline, in what are termed “cold wallets,” making finding and evaluating them or determining the historical acquisition cost, potential gains, and associated tax implications incredibly complex.

Cryptocurrencies operate on what is known as blockchain technology. While the advantage of this is that it ensures transparency, it also enables anonymity, making it difficult to determine whether hidden crypto holdings exist. Unlike traditional assets, cryptocurrencies aren’t physical and don’t have centralized records.

If you or your spouse have cryptocurrency holdings, it is likely that you will need to enlist the help of a forensic accountant to uncover potentially undisclosed assets. The equitable distribution of cryptocurrency is further complicated by the lack of regulatory framework surrounding it. Most courts do not fully understand the assets, and this unfamiliarity, the lack of precedent, and the asset’s volatility combine to make the outcomes very unpredictable. There are also complexities surrounding transaction fees, private keys, and wallet addresses – all of these are terms and technicalities that may be unfamiliar or unknown to the other spouse. The risk of misrepresentation, as well as incorrect transfers, is high.

If you are facing divorce and either know or suspect that your distribution of assets will require addressing issues surrounding cryptocurrency, you must work with attorneys who have deep knowledge and experience in dealing with them. For information and assistance, contact us today.