In Minnesota, upon the dissolution of a marriage, the court will make a “just and equitable division” of all marital property. One relatively new asset class, cryptoassets, is gaining widespread popularity and thus becoming more common in divorce cases. However, when cryptoassets are involved, the division of marital property can become even more complicated. It is important for divorce professionals to have a working knowledge of digital assets to successfully navigate cases where either or both spouses hold cryptoassets. Read on to get an idea of what cryptoassets are, how they’re accessed, and how they impact a divorce case.
What are Cryptoassets?
Cryptoassets utilize a revolutionary technology referred to as Blockchain. Blockchain, paired with cryptography, allows for an accurate and secure environment for transactions to take place. This pairing can create what is called a distributed ledger. If a distributed ledger is public then users can verify any activity taking place across the ledger, while hiding identities through cryptographic techniques. Cryptocurrencies (e.g., Bitcoin or Crypto.com Coin), utility tokens, and non-fungible tokens (NFTs) are all different types of cryptoassets to be considered.
How are Cryptoassets Accessed?
Cryptoassets are commonly purchased on exchanges. Exchanges act as the bridge between fiat currency (like the U.S. Dollar) and digital assets. Once cryptoassets are acquired, they are held in a “wallet.” A wallet is a piece of hardware or software that encompasses two important elements: public keys and private keys.
- Public keys (or public addresses) are the receiving addresses of a wallet. Public keys are the element of a wallet that communicates where cryptoassets are sent. Each public key corresponds to a number on the blockchain. Through cryptography, a public key gives no indication of who owns the wallet or what other assets the wallet may have.
- Private keys are the “passwords” of the wallet, held by the individual owner of the cryptoassets. A private key allows the owner to make transactions from the wallet and transfer cryptoassets out of the wallet.
The Impact of Cryptoassets on Divorce
Without knowing the private key, it is extremely difficult to trace a cryptoasset back to its owner. In a divorce, all private keys must be known to confirm whether either party owns digital assets, as well as the value of the digital assets held.
Both spouses are obligated to provide full disclosure of all assets owned, including any cryptocurrency, as part of the discovery process. However, due to their inherent anonymity, cryptoassets may be easily hidden. If a party suspects their spouse is not fully disclosing the cryptoassets they hold, the divorce team may:
- Examine financial statements (e.g., tax documents, bank and brokerage statements, credit card statements, etc.) for any unexplained transfers, investments, or spending
- Look for evidence on electronic devices (most cryptoasset transactions are made using phones or computers)
- Request a disclosure of all apps on the spouse’s smartphone to search for crypto-related apps
- Request a deposition to ask the spouse direct questions about any cryptoassets
- Hire an expert to track and trace assets (however, consider whether the cost of the investigation outweighs the potential value held in cryptoassets)
Conversely, for any spouse who owns cryptoassets, it is advisable to be honest about the amount and value of the assets held. It is also important to never delete anything related to the cryptoassets held.
Division of Cryptoassets
Any cryptoassets included in the marital estate must be allocated in the same manner as any other marital property. Once equitable division is determined, the spouse without cryptoassets can receive their share of the value in one of three ways:
- Transfer: In this case, the spouse without the cryptoassets will need to open a wallet so they can receive a corresponding transfer from their spouse.
- Cash out: If preferred, the cryptoassets can be sold for cash; however, whoever sells the cryptoassets will be responsible for any tax consequences (e.g., capital gains upon sale if sold at a profit).
- Offset: The value of the cryptoassets may be offset from the value of another marital asset (or combination of assets) of equal value. In this case, the crypto holdings must be valued to ensure the spouse without crypto receives an asset(s) of sufficient value.
There are several considerations that may help the parties determine the best method for division of digital assets. The value of any cryptoassets holding could fluctuate dramatically, so the valuation date should take place as close to the settlement or trial as possible. The parties also must weigh the possible tax consequences of cryptoassets, such as capital gains taxes and reporting requirements. To ensure fair division and transfer of digital assets, it’s best if both parties have a strong understanding of cryptoassets and related matters, or access to a competent divorce team.
Helping You Get There…
If you have questions about cryptoassets or other financial matters as they relate to your divorce, it’s beneficial to consult a divorce financial professional. Contact Boulay’s Corey O’Connell, CPA/ABV, ASA today at coconnell@boulaygroup.com or (952) 841-3025.