Cryptocurrency is a digital form of money used for payments and investments, powered by secure, decentralized blockchains.
Unlike fiat money, cryptocurrency does not rely on banks or governments for control, verification, or transfer of funds. However, cryptocurrency can still be traced—and in a California divorce, it is subject to the same divorce laws as other types of property. Due to its digital nature, dividing cryptocurrency in divorce comes with a unique set of legal and financial complexities.
Are Digital Assets Considered Community Property?
In community property states like California, all assets acquired during marriage are generally subject to an equal (50/50) division upon divorce. This applies to digital assets including cryptocurrency (e.g., Bitcoin, Ethereum), Non-Fungible Tokens (NFTs), and even intellectual property, such as websites and social media accounts.
Separate property is not subject to division in divorce. These include assets acquired before marriage, assets specifically identified as separate property in a valid prenuptial agreement, and inheritances or gifts given to an individual spouse.
Disclosing & Uncovering Digital Assets in Divorce
Digital assets can make up a significant portion of the value of community property in a high-net-worth divorce. For example, a spouse might own a large amount of Bitcoin or be an influencer who earns a substantial portion of their income through social media accounts on platforms such as TikTok, Instagram, or YouTube.
In every divorce case, full financial transparency is required—and digital assets are no exception.
Concealment of assets is a serious issue in divorce, as it undermines the fair division of a community property. A spouse may try to hide wealth in cryptocurrency, as many assume it to be untraceable. At Kaspar & Lugay LLP, our attorneys collaborate closely with forensic accounting, digital forensic, and financial experts to uncover hidden assets.
- While specific wallets may be pseudonymous, blockchain transactions are recorded on a public ledger. Dedicated tools are available to track down wallets and identify the people who own them.
- We can subpoena centralized exchanges, banks, payment processors, and other third parties to obtain records that help trace hidden cryptocurrency assets.
- Forensic accountants review financial records, including bank and credit card statements, to identify transfers to or from cryptocurrency exchanges as well as unexplained activity such as large deposits or withdrawals.
- Digital forensic experts can review communications from texts, emails, or apps that indicate cryptocurrency activity.
Dividing Cryptocurrency in a California Divorce
Attorneys at Kaspar & Lugay LLP fight for fair and equitable settlements tailored to each client’s circumstances. We work diligently to ensure that your digital assets are divided favorably and in alignment with your unique set of goals and priorities.
- Equal Split: The simplest way to divide cryptocurrency in a divorce is to split each type equally. The benefit of this option is that dividing the same type of cryptocurrency does not require valuation. Cryptocurrency is liquid and fungible, making it easy to transfer to others with no change in worth.
- Cash Buyout: One spouse may offer to buy out the other person’s share of cryptocurrency at a fair cash value. This is usually the best option when one spouse has no interest in holding cryptocurrency.
- Asset Transfer: One spouse may offer their share of cryptocurrency in exchange for ownership of another asset, such as the marital home. The challenge of this option is accurately valuing both the cryptocurrency and the real estate.
Valuing Cryptocurrency in a California Divorce
Cryptocurrency is a volatile asset, sometimes with significant daily swings in value. Cryptocurrency is typically valued at its market value on the date of separation, date of filing, or date of settlement. Spouses may agree to using other valuation methods, such as taking its 12, 26, or 52-week rolling average.
Tax Considerations of Dividing Cryptocurrency in Divorce
Transfers of property between spouses incident to a divorce are generally not taxable under federal law. However, if either spouse later sells the assets, they may owe capital gains tax.
In negotiations, you can offer your share of the marital home in exchange for a certain amount of the other party’s share of cryptocurrency, but it is important to consider that there are differences in tax treatment.
Capital gains from the sale of a primary residence may qualify for a tax exemption. In contrast, no such tax exemption applies to cryptocurrency. As such, you may wish to negotiate a discount on the cryptocurrency you receive to account for potential future tax burden of selling it.
Real-Life Consequences of Hiding Assets in Divorce
Failure to disclose all assets during divorce proceedings is considered financial fraud and can result in legal penalties and court orders awarding a larger share of assets to the other spouse.
The California divorce case between Erica and Francis DeSouza illustrates the serious legal consequences of concealing information during divorce proceedings. After the filing of their divorce, Francis made multiple cryptocurrency transactions without Erica’s consent or knowledge. He disclosed ownership of 1,062.21 bitcoins, but later revealed that a significant portion was no longer in his possession and tied to the Mt. Gox exchange, which had declared bankruptcy.
The court determined that Francis had violated the automatic temporary restraining order (ATRO) and breached his fiduciary duty to Erica. He was ordered to transfer half of what was known to be the original amount of bitcoin to Erica and to pay her attorney fees and costs.
Legal Expertise Backed by Accounting, Finance, and Bay Area Startup Insight
As skilled negotiators and experienced trial attorneys, bring the skills and strategies needed to uncover hidden assets and divide complex assets fairly in high asset divorce cases.
Our firm brings together deep expertise in family law, extensive experience in business and commercial litigation, and a deep understanding of the Bay Area’s tech startup ecosystem. Partner Brent Kaspar is a Certified Public Accountant (CPA), and Partner Arvin Lugay has represented some of the nation’s most prestigious financial and banking institutions in high-stakes litigation.
If you have any reason to believe that your spouse is hiding income, or simply want to ensure an equitable divorce, call Kaspar & Lugay LLP.
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