Since they are often traded pseudonymously, cryptocurrencies can be difficult assets to locate
– and potentially a good place to hide assets during divorce. Here is what family lawyers must
know about cryptocurrency.
In full disclosure, for quite some time my general attitude toward “crypto currencies” has been as follows: ignore them and hope
they go away. Unfortunately, as family lawyers, we can no longer bury our heads in the proverbial sand.
Cryptocurrencies and “blockchain” 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 of assets.
Overview of Cryptocurrencies Created in 2009, cryptocurrencies (“cryptos”) are a form of decentralized
virtual currency that have been increasingly traded, often on virtual currency platforms. They are often
anonymously owned and thus pseudonymously traded. They are “stored” in virtual or cryptocurrency “wallets”:
desktop, smart phone, or cloud-based software. These currencies generally utilize novel “blockchain” technology
to record permanent, decentralized, and encrypted transactions to and from a virtual wallet.
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
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. There has been a great deal of volatility in cryptocurrency value: during 2017, the price of one Bitcoin
rose from around $900 to a high of $20,000. There have also been well known scams, thefts, and the shutting
down of crypto-exchanges. 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 on mensdivorce.com, Mat Camp calls the
attempt to hide such assets: “The hightech method of burying a sack of cash in the woods.” As divorce practitioners,
what can we do to effectively prevent such inappropriate actions?
First, we should consider adding 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
the issue of cryptocurrency, 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.
Finding Hidden Cryptocurrency. If you suspect a client’s spouse of harboring hidden cryptocurrency, then
there might be ways to discover the asset. Although Bitcoin and the like are
generally pseudonymously held, their purchase and sale do create trails: cryptocurrency
is generally 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. You could
subpoena such exchanges to procure transaction 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 these assets on tax forms in the future should make it easier to
follow the crypto trail in years to come. As always, consider retaining forensic
accounting experts if you or your client believes sufficient hidden cryptocurrency
assets may exist.
Are Cryptocurrencies a Passing Fad? 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 short term, there will be
more and more cases where a portion of marital wealth will be a cryptocurrency
held in the blockchain. Using innovative discovery and forensic accounting
techniques to locate these assets will become increasingly important – both
today 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.
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 haircut,
riding in an Uber, or talking to your
cousin at the annual family get-together.
Its 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