“A husband hid $500,000 in bitcoin during a divorce — and got busted by a crypto hunter.” This headline from CNBC last week tells an increasingly-common story – people are increasingly comfortable using both electronic payments (e.g. Pay Pal or Zelle), as well as cryptocurrencies, such as Bitcoin. And since cryptocurrency is harder to trace, it may be difficult to catch a spouse who fails to disclose his/her crypto holdings.
According to NBC, more than 20% of American adults have invested in or traded cryptocurrencies. While the shine has faded somewhat on crypto-currencies in the past 18 or so months, they still represent billions of dollars, and CoinMarketCap lists more than 24,000 different crypto currencies, the vast majority of which most people have never heard.
This means tens of millions of Americans with crypto holdings – this is a significant, and growing issue in divorce cases, presenting challenges for spouses and courts alike, not just finding and identifying the holdings, but once you do, valuing an asset whose value may fluctuate wildly during the divorce process.
This post concerns trying to identify and divide Bitcoin or other cryptocurrency in a divorce, and does not pretend to explain how crypto or digital currencies actually work. There is an alphabet soup of technical terms such as Blockchain, exchanges, ledgers, mining, wallets, and more, and people much much more knowledgeable than I am have written articles and books on the subject. A good starting point is this Wikipedia article.
Bitcoin is Marital Property in a Divorce
There is no reported appellate decision in Colorado regarding the division of cryptocurrency in a dissolution of marriage case, but the attorneys at Graham.Law have had plenty of cases where spouses had crypto holdings, and they were divided at the trial court every time without exception.
The Colorado Supreme Court defines a marital asset as “Everything that has an exchangeable value or which goes to make up wealth or estate.” Balanson, at p.35. While bitcoin is not a physical property, such as a car or house, or a traditional financial account, such as a mutual fund or 401(k) retirement, it has value, and is therefore an asset subject to division as marital property in Colorado.
Must Disclose Cryptocurrencies in a Divorce Proceeding
The fact that a crypto currency is marital property subject to division at divorce is beyond doubt. But as the article from CNBC makes clear, the harder part is proving the existence and value of holdings which, by their nature, are intended to be private and anonymous, and are therefore popular on the “darknet” or to pay hackers holding companies’ data for ransom.
In most cases where we have bitcoin, the spouse at least has some knowledge that the digital asset exists, and in most cases, the spouse with such holdings does not try to conceal them. Those cases are easy, and limited to verifying the nature and value of the crypto holdings which were already disclosed.
But when a spouse tries to hide his cryptocurrencies in a divorce, it’s more complicated. In the divorce case discussed in the CNBC article, the wife thought it was suspicious that her husband, with an income of $3m per year, had no assets to his name. It took a forensic accountant six months to prove the existence of 12 bitcoins, then worth over a half million dollars.
On television, forensic computer experts scour hard drives and web browsing history to find the smoking gun. But not every case involves hundreds of thousands of dollars, or state secrets, and most spouses going through a divorce lack the funds for a serious deep dive into hidden cryptocurrency holdings.
And recall that there are 24,000 different crypto currencies, not just bitcoin. Similarly, there are a plethora of exchanges and digital wallets where the holdings may be. For serious cases, a spouse may hire a certified cryptocurrency forensic investigator, but for the average person, more old-fashioned techniques will have to be employed.
Ask for Crypto in Discovery Requests
The starting point for any search for digital or crypto currency is a discovery request. While Colorado’s pattern requests do not mention cryptocurrencies (there was a move afoot a few years ago to revamp the questions, thus far nothing appears to have become of it).
Fortunately, spouses can also ask “non-pattern” discovery requests, so at Graham.Law where we really want to lock in the claimed holdings of the other spouse (not just crypto, but all accounts), we ask two questions. First, we ask a broadly-worded non-pattern interrogatory which asks for the account details for every conceivable financial account, including bitcoin and other digital or crypto:
“Provide the complete details of every business or personal financial asset or account of any type (bank, credit card, loan, investment, stock, retirement, digital, online, virtual or cryptocurrency, NFT, Bitcoin, Ethereum, Apple Pay, Google Pay, Samsung Pay, Paypal, Zelle, Venmo, Coinbase, etc) in which during the marriage you have had an interest in or access to, have invested in, or which was held on your behalf, including but not limited to:
(a) type of interest, and names, contact information, and relationship to you of any co-owners;
(b) name, address & telephone number of the company/financial institution/wallet/exchange;
(c) account type & number;
(d) dates during which you held an interest;
(e) the high balance value and date during the marriage;
(f) if opened during the marriage, the source of funding of such asset/account;
(g) the current status and balance of such account; and
(h) if closed, the full details of such closure, including disposition of the proceeds or balance.”
You can tell I’m a fan of questions which ask for every imaginable detail to provide as little wriggle room as possible. And to cap it off, we then ask a companion non-pattern request for production of documents which asks for documents for such accounts to verify the information provided:
“All documents pertaining to your response to Non-Pattern Interrogatory # __ (financial assets/accounts) for accounts in which you have held an interest during the marriage, including, but not limited to:
(a) last three years of monthly statements;
(b) if virtual/digital/crypto, screenshots of wallets/exchanges and last three years of email confirmations of transfers to or from such accounts;
(c) if account is closed, then statements, correspondence, or other documents showing closure or termination of interest, the final balance, and disposition of its balance.”
One common defense with crypto currency when someone is confronted with some proof of ownership is to claim “I sold it” – these questions seek not only current statements, but anticipate that defense by asking for details of the closure of any such accounts.
Scrutinize Regular Bank Transactions
If a spouse does not disclose any digital or cryptocurrency holdings, the next step will be to review his/her normal bank and credit card statements. While crypto accounts themselves are hard to find, the source account for their funding is not. So we look for any unexplained transfers into accounts we do not have statements from, wire transfers, or large cash withdrawals. If a spouse is regularly hiding funds in Bitcoin, there will be at least some record of the money in marital or known accounts before it disappeared.
While the client or attorney can often look at bank statements and readily identify questionable transactions, if there are a large number of transfers between accounts to decipher, some “legit” and others which seem outside the normal course of business, it may be advisable to hire a forensic accountant to pour through the statements and identify issues. This is cheaper than a full-blown forensic deep dive, and more cost-effective than paying a lawyer to scrutinize a series of transactions.
Reviewing a few years of statements will identify transactions for a spouse who continues to invest, it will often not find a “one and done” investment made years previously. And this could be significant – someone who dabbled in cryptocurrency by buying just one Bitcoin several years ago when it cost hundreds per coin had an asset worth tens of thousands at its peak, and still worth a pretty penny!
Email Transaction Confirmations
You may note that the above non-pattern discovery requests asks for email transaction confirmations. The obvious problem is that if a spouse is going to hide assets, she is not about to voluntarily admit to having emails pertaining to those same concealed assets!
So this one would ultimately also require a forensic computer expert to scour hidden or deleted emails to see if there is anything there – which may again be beyond the cost most divorcing spouses are willing or able to pay.
Tax Records to Find Hidden Crypto Accounts?
This one is probably not as helpful, particularly if a spouse has offshore holdings where taxes were never paid, or has not actively sold crypto currencies, so has no realized profits. But when a spouse has been actively trading crypto accounts, with realized gains which were taxed, then sometimes identifying the existence of crypto holdings may be as simple as looking at 1099s, if applicable, or tax returns.
This is another one which is not very common, but a spouse who has applied for a mortgage or other loan recently may well have an incentive to put his best foot forward, and list all assets on the loan application, including bitcoin
5-Year Lookback for Hidden Assets
Finally, if all else fails, and during the divorce process you do not locate any hidden crypto assets, but after the divorce, your ex-spouse appears to have a bunch of money to blow which did not seemingly exist at divorce, then under Colo. R. Civ. P. 16.2(e)(10), the courts have jurisdiction for up to five years to reopen the dissolution case and divide any concealed assets.
Talk to your family law attorney about how best to track down crypto-currency holdings. While we lack the expertise to actually investigate it ourselves, we do know enough to help advise which methods may be most effective.
FAQ – Cryptocurrency at Dissolution of Marriage
Is cryptocurrency an asset for purposes of a divorce?
Yes. As with any other account, if the cryptocurrency has value, then it is treated like any other asset at divorce.
How is cryptocurrency handled in divorce?
As with other assets, the cryptocurrency must be identified, then valued as of the date of the hearing, and finally divided as part of the marital estate.
Do you have to disclose Bitcoin in a divorce?
The law requires spouses to disclose all assets and debts during the divorce process on a sworn financial statement, and that includes cryptocurrencies such as Bitcoin.
Is is illegal to hide money from your spouse?
During a marriage, there is no law preventing spouses from hiding assets. But upon filing for divorce, each spouse must file a sworn financial statement which lists, under penalty of perjury, all of their assets & debts. Deliberately concealing an asset during a divorce is a crime, and may lead to negative repercussions in family court.
How to use Bitcoin to hide money during a divorce.
You’re kidding, right? This post is to help people going through a divorce understand the law, not to provide information on how to circumvent it!
Can banks track bitcoin for divorce?
No. While a bank statement may be useful to identify money which has been transferred to a cryptocurrency wallet, the bank itself does not track funds once they have left your account there.
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