In full disclosure, for quite some time my general attitude toward “cryptocurrencies” has been as follows: ignore them and hope they go away. Unfortunately, as divorce lawyers, we can no longer bury our heads in the proverbial sand.
Cryptocurrencies and “block-chain” technology may or may not be the wave of the future, but they are an increasingly commonly held “asset” class—and one that will have to be dealt with in equitable distribution and in divorces in general. As usual, the law tends to lag behind technology, meaning there are few if any published opinions on this subject. This article will attempt to address basic principles that may apply to this volatile and burgeoning class.
Overview of "Cryptocurrencies"
Cryptocurrencies (“cryptos”) are a form of decentralized virtual currency that were created in 2009 and have been increasingly traded, often on virtual currency platforms. They are often anonymously owned and thus pseudonymously traded. They can be stored in various avenues such as a “virtual wallet,” on a smart phone, or in a virtual cloud. These currencies generally utilize novel “blockchain” technology to record permanent, decentralized, and encrypted transactions.
In 2014 Under Notice 2014-21 the IRS defined cryptocurrencies as follows: “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” The IRS also noted in 2014-21 that: “The IRS is aware that ‘virtual currency’ may be used to pay for goods or services, or held for investment.”
Security is a great concern regarding these types of currencies. Although Bitcoin is the most well-known type of cryptocurrency, there are now various types of these “coins” ranging from Bitcoin down to “penny-stock” type of exchanges. During 2017 the price of one Bitcoin rose from around $900.00 to a high of $20,000. Thus there has been a great deal of volatility in its value. There have also been well-known scams, thefts, and the shutting down of crypto-exchanges. In other words, it’s the “Wild West” of investing.
In a run-up commonly compared to Holland’s 17th Century “Tulipmania” bubble, the investment class has outpaced a hot stock market. You can now hear about cryptocurrency investment tips while getting your hair cut, riding an Uber, or talking to your uncle at the annual family get-together. Their relative anonymity makes it a difficult asset to locate—meaning it may be ripe for inappropriate divorce-planning attempts. That risk coupled with its increasing use amongst the general population means that divorce attorneys must learn the basic principles of cryptocurrencies to provide clients with necessary guidance.
Cryptocurrencies and Equitable Distribution
The treatment of cryptocurrencies for equitable distribution purposes is in theory not too dissimilar from any other asset. If at the time of divorce there exists two Bitcoins and no marital exemptions apply (such as non-commingled premarital property, gifts, inheritance, etc.) then each party should generally be entitled one Bitcoin. Likewise, one party could buy the other out provided there is agreement as to the valuation. The more interesting questions arise under protecting against a party attempting to hide these digital assets.
Because cryptocurrencies can be pseudonymously transferred to others, it may be difficult to determine ownership. In an article on the subject of cryptocurrencies and divorce, the website mensdivorce.com calls the attempt to hide such assets: “The high-tech method of burying a sack of cash in the woods.” As divorce practitioners, what can we do to effectively foreclose such inappropriate actions?
Firstly, it may be prudent to add specific cryptocurrency questions to all initial discovery requests. Although general questions as to currencies, monies, or assets may be sufficient, it may be helpful to ask in interrogatories whether the spouse owns or has ever owned any cryptocurrencies. Likewise, this issue can be specifically raised in requests for admissions, at depositions, and at trial. By specifically addressing these issues the opposing spouse is more likely to be upfront and also more likely to be sanctioned if it is later discovered they are attempting to hide assets.
If there remains a suspicion of a spouse harboring hidden cryptocurrency, then it should be noted that although Bitcoin and the like are generally pseudonymously held, their purchase and sale do create trails as follows: such currency will generally be purchased using fiat currency (creating a record) and most cryptocurrencies are purchased via an exchange (the largest one at the moment is Coinbase.com), which will charge transaction fees. It is also possible that you could subpoena such exchanges to procure such records.
The IRS has recently issued a summons seeking “a wide variety of records [from Coinbase.com] including…taxpayer identifiers for all of its customers who have bought, sold, sent or received cryptocurrency worth $20,000 or more in any tax year from 2013 to 2015, transaction logs, and correspondence.” Accordingly, there may be ways to obtain releases and or to subpoena such records to determine the existence of cryptocurrencies. Tracking such assets on tax forms in future years should make it easier to follow the crypto trail in future years. As always, the option to retain forensic accounting or other such experts may be appropriate when in doubt and if it is believed sufficient hidden assets may exist.
Whether cryptocurrencies will be merely a “flash in the pan” or the start of a new way of global commerce, not even our foremost futurists know for sure. But in the present moment, there will increasingly be cases where a portion of marital wealth will be held in the “blockchain.” Using innovative discovery techniques to locate such assets will be important now and in the future.
Carl Taylor III is the principal of Carl Taylor Law, LLC located in Flemington, New Jersey. His practice emphasizes all facets of family law as well as local government law and litigation.
(This article was originally published in Family Lawyer Magazine, Spring 2018 “Technology and Family Law” Issue