Is it Necessary to Declare Cryptocurrency During a Divorce?

Cryptocurrencies such as Bitcoin operate outside of the traditional banking and financial system, are
strictly digital in nature, and aren’t under the control or jurisdiction of any country or government. This
has led some people to ask whether or not it is necessary to declare cryptocurrency holdings when going
through a divorce. While the answer to this question along with other information found in this article
can vary depending on the country the individual is located in the answer in the vast majority of cases is
yes, you are required to declare your cryptocurrency assets during divorce proceedings.

What are Cryptocurrencies?

Cryptocurrencies are digital assets or currencies that utilize cryptography to make transactions more
secure which allow individuals transfer funds, and pay for goods and services. Unlike traditional
government-backed currencies, cryptocurrencies are not controlled or issued by any central bank or
party; the rules surrounding issuance and supply are pre-programmed from the outset and cannot be
changed. Individuals can own cryptocurrency without involving of any intermediary or custodian such as
a bank.

Asset Classification

Different classes of assets and properties have different implications when it comes to divorce. In most
countries, there’s no law that explicitly spells out what is supposed to happen to cryptocurrency assets
in the event of a divorce, at least not in Canada or the United States. Rather, cryptocurrency gets
grouped in with one of a variety of other asset classes.

Methods & Approaches

The most common method countries take is to
classify it as a commodity just like gold or silver, as is the case in Canada in most cases. In the United States, it’s generally treated as intangible property. Some countries treat cryptocurrency the same way
as they treat ‘hard’ government-backed currencies, but this approach isn’t all that common. Other
countries treat cryptocurrency the same way securities like stocks and bonds are treated.
When reporting cryptocurrency as an asset during divorce, it’s first important to understand how it will
be classified during divorce proceedings in your jurisdiction in order to understand the implications,
which a divorce lawyer can be able to offer you guidance on.

Disclosure

You should be fully disclosing your cryptocurrency assets when going through divorce proceedings. This
means disclosing all current cryptocurrency assets, the applicable wallet addresses (akin to accounts),
exchanges utilized and trading history. You may also need to state the value of these assets in your local
currency which can be quite challenging given how volatile they are. Generally speaking, you should
attempt to provide the Fair Market Value (FMV) of these assets when required to do so in your local
currency.

Storage

Cryptocurrency isn’t held in a bank account. Rather, it is always stored on the blockchain. You can access
your currency via a ‘wallet’ which is somewhat of a misnomer because it doesn’t actually hold any funds.
Rather the wallet holds ‘keys’ which allow you to access the funds stored on the blockchain.

Furthermore, the addresses don’t have anyone’s name attached to them, which can make ownership of
cryptocurrency assets difficult to track.

Non-Disclosure of Cryptocurrency Assets

Sometimes a party will elect to not properly disclose cryptocurrency assets when going through a
divorce for obvious reasons; they don’t want to have to pay or give up their assets or a portion thereof.
Because cryptocurrency operates outside of the traditional banking system, it becomes far more difficult
to track and prove ownership of assets, or seize them if need be.

The whole process can prove to be time-consuming, expensive, and cumbersome, with no certainty that
cryptocurrency assets will be recovered, or even found for that matter. And that presents a serious
problem (or opportunity) for divorcees. In all likelihood you will likely need the help of a digital forensics
expert to help track and prove ownership of assets before attempting to seize them or take other legal
action.

However, in the vast majority of cases, people are either correctly reporting cryptocurrency holdings
during divorce proceedings or at least attempting to do so, even if not correctly. Attempting to hide
cryptocurrency assets does more than just demonstrate ‘bad faith’ though. In many cases it is illegal as
well and can open the individual up to fraud charges.

Distribution of Assets

Once a settlement is reached, the parties need to deal with the distribution of assets. The challenge
here is that the price of the underlying cryptocurrencies may have increased or decreased significantly
from the time when an agreement was reached until the time of the distribution. This could lead to one
party having significantly more than the other depending on the valuation method and settlement
terms; if value has declined more than 50%, one party maybe end up owing the other more than 100%
of the current value of the assets after settlement!

Other Considerations

Both parties ought to recognize that due to the wild swings in value, the distribution of cryptocurrency
assets should be percentage-based if possible, based on whatever value they end up being liquidated at.
However, it’s also worth considering the possibility of not liquidating the assets at all as this would likely
tend to trigger a capital gains tax (or a capital loss), so one party may wish to send the applicable portion
of cryptocurrency to the other without liquidating. However, even in this case the portion of the funds
sent to the other party would be considered a taxable event in some jurisdictions.

Note: Nothing in this article is to be construed as legal, financial, or tax advice.

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