In 2017 millions of people invested in Bitcoin and other cryptocurrencies. Millions of people also got divorced. Therefore, several Bitcoin owners got divorced and had to address the division of their marital assets…which included this new and strange asset which is difficult to verify and difficult to value.
In an Illinois divorce the first step in regards to division of marital assets is a full disclosure of all assets both marital and non-marital. The initial disclosure is done by listing your assets on the financial affidavit.
Typically, the opposing party’s attorney will scour the financial affidavit and ask for documents to verify the claimed assets. The opposing attorney will issue a “Notice To Produce” asking for copies of statements for your 401k, bank accounts, etc. If you have access to those documents, you must provide the opposing party a copy if they request it. Failure to do so can result in a finding of contempt of court.
But, how would you verify Bitcoin holdings? Would you print a screen grab from Coinbase or other online platform through which you hold Bitcoin or other cryptocurrencies? Would you entrust your ex or their attorneys with the password to your accounts? At this time there is no clear answer as there is no precedent.
If you cannot provide adequate evidence of your assets, the opposing party may issue subpoenas to third parties in relation to your case. For example, the opposing party may issue a subpoena to your 401k account provider who will summarily provide any records asked for if there is no written objection. But, in the case of Bitcoin and other cryptocurrencies, who can be subpoenaed? Cryptocurrencies by their very nature exist on a peer-to-peer network that is not held by any one individual. There is no holder of the asset to subpoena.
The IRS has provided us with a partial answer. The IRS has recently issued subpoenas to Coinbase, a cryptocurrency exchange and a federal court has ordered Coinbase to provide:
1. taxpayer ID number,
3. birth date,
5. records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and
6. all periodic statements of account or invoices (or the equivalent).
This is like subpoenaing a bank and asking not “what’s in your accounts?” but rather “what checks have your clients issued.” Obviously, this is a complicated and obscure analysis to determine the location and value of an asset.
I predict a proliferation of alternative cryptocurrency exchange sites will arrive and the transfers between them will become so byzantine that it will extremely difficult to trace the current cryptocurrency amount and value.
After determining the existence and quantity of a party’s cryptocurrency, the next step in the analysis is “what portion of the cryptocurrency is marital.” In Illinois, all property held by either party is presumed marital property unless it falls under one of the exceptions in 750 ILCS 503(a). If for some reason the cryptocurrency held by you or your spouse is a mix of marital and non-marital you’ll have to unwind the respective values based on when they were purchased (before or after the marriage).
Finally, determining the value of the cryptocurrency will be difficult. The volatility of the price of these assets makes it very difficult to adequately value at the time of the divorce. Discovery and final negotiation of a divorce often takes months and in that time a cryptocurrency could double or halve in value…several times.
A cash out of the cryptocurrency before the finality of the divorce is probably advised to finalize the marital value. If one spouse objects, it’s not clear that the court has authority to order a cash-out before trial.
In the future, I am certain that we will have new legislation and appellate court cases to guide us in regards to this new asset and how it will be treated under Illinois law. For now, cryptocurrencies remain a volatile issue with little legal certainty. This allows a lawyer educated in the matter a great deal of leverage in negotiations.