More than a decade after Bitcoin launched, cryptocurrency has become mainstream and, therefore, relevant when it comes to property division in divorce. This form of currency can carry a high value, but it’s also more easily hidden than traditional assets. Divorce attorneys need to get up to speed to help protect their clients’ interests.
Learn the Basics
The term “cryptocurrency” generally refers to a form of digital (or virtual) currency. Beyond Bitcoin, there are thousands of other cryptocurrencies in circulation. Cryptocurrency is used by millions of people in everyday transactions. A growing number of businesses — including Overstock.com, AT&T and online gaming company Zynga — now accept digital currency payments.
The value of a cryptocurrency comes in part from its scarcity. The supply of bitcoins, for example, is limited to 21 million “coins.” Transfers occur instantly and are tracked in a transparent blockchain ledger. The ledger resides not with a central authority, such as a financial institution or governmental body, but across decentralized public peer-to-peer computer networks. Transactions are conducted using private and public “keys” that users store in “digital wallets.”
The primary benefit of using cryptocurrency is privacy. But there’s a related downside: This aspect can make it harder to uncover cryptocurrency assets. Plus, cryptocurrency is highly liquid and hard to understand, and attorneys have no central authority to subpoena or target it with a court order.
Recognize Cryptocurrency Clues
If you suspect that a spouse has undisclosed cryptocurrency assets, look for transaction confirmation emails that include the conversion rate, dollar amount, date and time. A confirmation email also might specify where the funds were withdrawn or deposited.
Transactions could show up, too, on bank or credit card statements. These statements can reveal payments to or deposits from cryptocurrency exchange companies, such as Coinbase, PayPal, Venmo and other mobile payment options should also be reviewed for transactions with cryptocurrency exchanges.
Federal tax returns are another avenue for discovering cryptocurrency interests. The IRS requires taxpayers to recognize gain or loss on the exchange of it for cash or other property (including exchanges for other cryptocurrencies) — that is, whenever it’s used to purchase goods or services. Beginning in 2019, the IRS has included a check box on individual returns to indicate whether the taxpayer has received, sold, sent, exchanged or otherwise acquired any financial interest in any cryptocurrency.
Consider including explicit references to cryptocurrencies in discovery requests and interrogatories. Examples of items to request include:
- Forms 1099-K issued by cryptocurrency exchanges,
- A list of digital assets held, received, accepted, used, purchased or sold as of a certain date, and
- Computer hardware and software devices used (or previously used) in connection with digital assets.
If devices are turned over for examination, computer forensic experts can search for evidence of cryptocurrency transactions, such as keys, wallets and Internet history.
Once cryptocurrency has been identified, it needs to be valued. The value of cryptocurrencies is influenced by different factors than traditional assets, so it can fluctuate wildly. If your divorce case involves cryptocurrency, make sure you hire a qualified appraiser who’s familiar with the ins and outs of digital assets to obtain a fair and accurate valuation.
theKFORDgroup litigation team holds extensive knowledge and experience in expert witness engagements, forensic accounting, and business valuations. Our experts are trained and experienced in the litigation process. We can help you find and value the cryptocurrency in your next case. For more information, please call us at 210-340-8351.
Additional information included in this report was provided by PDI Global/Thomson Reuters © 2021