Introduction:
Divorce is already a complex process, but it becomes even more challenging when cryptocurrency enters the mix. As digital assets like Bitcoin, Ethereum, NFTs, and other cryptocurrencies become more mainstream, they are increasingly considered in divorce proceedings across Texas. However, the unique nature of these digital assets — their volatility, anonymity, and complexity — poses challenges for asset division.
Understanding Cryptocurrency in a Texas Divorce
Cryptocurrencies like Bitcoin are digital currencies that use cryptographic technology for secure financial transactions. They can serve as a store of value, an investment, or a medium for daily transactions. Because Texas follows community property law, all assets acquired during the marriage — including cryptocurrency — are generally subject to division upon divorce.
However, the nature of cryptocurrency makes it difficult to handle during a divorce:
- Anonymity and Concealability: Cryptocurrency transactions are often anonymous and can be conducted without the need for traditional financial institutions.
- Volatility in Value: Cryptocurrencies can experience extreme fluctuations in value, which can make it difficult to assess their worth at the time of division.
- Accessibility and Control: Unlike traditional assets, which can be held in banks or brokerages, cryptocurrencies are often stored in digital wallets that can only be accessed with a private key.
How Cryptocurrency is Treated in Texas Divorce Law
In Texas, cryptocurrency is treated as property rather than currency. If the cryptocurrency was acquired during the marriage, it is likely considered community property and subject to fair and equitable division. However, there are situations where cryptocurrency may be classified as separate property — for example, if it was owned before the marriage or acquired as a gift or inheritance.
Key Steps for Handling Cryptocurrency in a Divorce
- Identify and Locate the Cryptocurrency: Spouses are legally obligated to disclose all assets during a divorce, including digital assets like cryptocurrencies. However, given the nature of crypto, it’s easy to hide or overlook these assets.
- Valuate the Cryptocurrency: Once identified, the cryptocurrency needs to be accurately valued. Given its volatility, the date of valuation and its pricing method are critical.
- Divide the Cryptocurrency Fairly: Once valued, the court will determine how the cryptocurrency should be divided under Texas community property rules.
Let’s break down each of these steps in detail.
Discovering Hidden Cryptocurrency in a Divorce
The anonymous and decentralized nature of cryptocurrencies can make it challenging to find and identify these assets. Here are some strategies commonly used to discover hidden cryptocurrency during a divorce:
- Reviewing Financial Statements and Transactions
- Look for unexplained transactions or transfers on bank statements, credit card bills, or other financial accounts that could indicate the purchase of cryptocurrency.
- Examples: A spouse may withdraw cash to purchase Bitcoin from an exchange, transfer funds to a crypto wallet, or make payments to well-known crypto platforms like Coinbase or Binance.
- Subpoenaing Records from Cryptocurrency Exchanges
- If there is suspicion that a spouse holds cryptocurrency, you can issue a subpoena to crypto exchanges to provide records of transactions, account balances, and asset holdings.
- Examples: If a spouse used exchanges like Kraken, Gemini, or Coinbase, the subpoenaed records may reveal account balances and trading activity.
- Digital Forensics and Wallet Tracking
- Digital forensics experts can analyze a spouse’s digital devices — computers, phones, tablets — to find evidence of crypto transactions, wallet access, or crypto exchanges.
- Blockchain experts can trace the blockchain ledger (a public record of all crypto transactions) to track down wallets and transactions connected to the spouse.
- Examples: Forensic analysis might uncover apps or browser extensions associated with crypto wallets (e.g., MetaMask), emails confirming crypto transactions, or private keys stored on digital devices.
- Reviewing Tax Filings
- Tax returns can be a valuable source of information. Although cryptocurrency is decentralized, the IRS requires disclosure of crypto transactions. Gains or losses from crypto trading should be reported on tax returns.
- Examples: If a spouse has reported crypto investments or gains on their tax return, this is a clear indicator of their ownership of digital assets.
Valuing Cryptocurrency in a Texas Divorce
Valuing cryptocurrency during a divorce can be a challenge due to its volatility and market fluctuations. Here are some of the approaches and considerations for valuing digital assets:
- Determining the Date of Valuation
- The value of cryptocurrency can vary widely depending on the date chosen for valuation. A court will typically choose a specific date to assess the value, but it may be difficult if the crypto’s price has fluctuated dramatically.
- Examples: If Bitcoin is valued at $50,000 per coin on one day but drops to $40,000 per coin within weeks, the timing of valuation can significantly impact the division of assets.
- Market Valuation Based on Exchange Rates
- The value of a cryptocurrency is often determined by the market rate on a particular exchange on the valuation date. Since different exchanges may offer slightly different prices, choosing the right exchange is crucial.
- Examples: Valuing Ethereum on Binance versus Coinbase could lead to different values, so both parties may need to agree on the exchange to use for valuation purposes.
- Considering Conversion to Traditional Assets
- In some cases, the court may order the cryptocurrency to be converted to traditional assets like cash or securities before the division takes place. This can help mitigate future volatility and simplify the division of property.
- Examples: If a spouse owns a large amount of volatile cryptocurrency like Dogecoin, the court may require its liquidation and distribution of the proceeds to avoid fluctuations in value post-divorce.
Dividing Cryptocurrency in a Texas Divorce: Approaches and Examples
Once the cryptocurrency has been identified and valued, the next step is to divide it. Here are some of the most common approaches to dividing digital assets in a Texas divorce:
- Direct Division of Cryptocurrency
- The most straightforward method is to split the cryptocurrency holdings equally or equitably between both spouses.
- Examples: If a couple owns 10 Bitcoin, each spouse may receive 5 Bitcoin, or the division may be adjusted based on other marital assets to achieve an equitable division.
- Offsetting Other Assets Against the Cryptocurrency
- If one spouse wishes to retain the entire cryptocurrency holding, they can do so by offsetting its value against other assets of similar worth. This is often referred to as a “buyout.”
- Examples: If one spouse wishes to keep their Ethereum holdings, they can transfer other assets, like a share of a retirement account, real estate, or cash, to the other spouse in exchange for the crypto.
- Selling the Cryptocurrency and Dividing the Proceeds
- Given the volatility of cryptocurrency, some spouses prefer to sell the digital assets and divide the proceeds evenly or equitably. This approach avoids the risk associated with holding the crypto long-term.
- Examples: A couple holding a volatile cryptocurrency like Shiba Inu may decide to liquidate the entire holding to cash out and then divide the proceeds, ensuring that both parties walk away with an equal share without the risks of market swings.
Examples of Cryptocurrency Asset Division in Texas Divorce Cases
Let’s look at some real-world scenarios of how cryptocurrency assets were discovered and divided in Texas divorces:
Example 1: Bitcoin Accumulation During the Marriage
A husband began investing in Bitcoin early in their marriage when the price was relatively low. As the price of Bitcoin surged over the years, the wife was unaware of the investment’s value. During their divorce, the wife’s attorney discovered the wallet addresses and holdings through a digital forensics’ investigation.
- Valuation and Division: The court valued the Bitcoin at its current market price and divided the assets equitably. The husband retained the Bitcoin but offset its value with other assets like cash and a portion of their home equity to the wife.
Example 2: Concealed Crypto Wallets
A wife owned multiple digital wallets containing Ethereum, Litecoin, and Ripple. She believed that by storing the assets in cold wallets (offline hardware wallets), they would remain hidden. The husband, however, noticed inconsistencies in their financial records, such as missing income and unexplained purchases.
- Discovery and Outcome: A forensic accountant was able to trace funds withdrawn from their joint bank account and matched them to crypto transactions. The court ordered the wife to disclose all wallet holdings, which were then valued and divided as community property.
Example 3: NFT Art Collection Valuation
A couple accumulated a significant NFT (Non-Fungible Token) art collection during their marriage. The collection included digital art pieces valued at over $200,000. During the divorce, both spouses sought to retain ownership of the NFT collection.
- Valuation and Division: The NFTs were appraised based on their current market value, rarity, and demand. The spouses agreed to a split where each received an equal number of NFTs, with similar values. Alternatively, in some cases, the NFTs may be auctioned or sold, with the proceeds divided.
How can we assist?
Cryptocurrency can add complexity to the property division process in a Texas divorce. With digital assets becoming more popular, it’s important to understand how they are discovered, valued, and divided under Texas family law. Whether you are the spouse who owns cryptocurrency or suspect that your spouse is hiding digital assets, working with experienced legal professionals and financial experts is essential to securing a fair settlement.
At our firm, we have extensive experience assisting clients with divorce cases. Our team includes a board-certified family law attorney, with advanced business degrees, and a specialist in negotiation and mediation. Contact us at 832-538-0833 to schedule a consultation and get personalized legal advice on your situation.