Cryptocurrency and Divorce: How Digital Assets Are Divided In North Carolina

INTRODUCTION

Cryptocurrency, such as Bitcoin and Ethereum, is a growing part of many couples’ financial portfolios. However, unlike more traditional, tangible assets, cryptocurrency poses a unique challenge in divorce proceedings.

The division of cryptocurrency in divorce proceedings can be particularly complex for several reasons. First, the value of cryptocurrency can, and does, fluctuate dramatically, making it challenging for courts to determine its value during equitable distribution proceedings. Additionally, due to the anonymous nature of cryptocurrency, it is an asset that is easy to hide if the spouse in possession does not disclose it. Furthermore, due to the intangible nature of cryptocurrency and the technological challenges associated with it, it may be difficult to understand its true value. Moreover, due to the lack of legal guidance regarding cryptocurrency, courts are left largely to use their own judgment about how to value and divide it.   

HOW DOES NORTH CAROLINA HANDLE CRYPTOCURRENCY IN DIVORCE?

North Carolina is an equitable distribution state, meaning that when a couple gets divorced, the court aims to divide their property fairly, though not necessarily equally. However, before the division of property can occur, the court must divide all the assets into three different categories:

• Marital Property (subject to equitable division)
  • Assets acquired by either spouse during the marriage and before separation
• Separate Property (not subject to division in most cases)
  • Assets owned by one spouse before the marriage, or received by gift or inheritance during the marriage
• Divisible Property
  • Changes in the value of marital property that occur after the date of separation and prior to the date of distribution

Cryptocurrency, even though it is digital, is treated like any other asset and will be included in the equitable distribution process if it is found to be marital property.

HOW ARE CRYPTOCURRENCY ASSETS DIVIDED?

Like any other asset subject to division in a divorce, the division of cryptocurrency generally involves three key phases: (1) disclosure and transparency, (2) valuation, and (3) distribution. While these steps align with the broader framework of equitable distribution, cryptocurrency presents unique challenges and nuances that distinguish it from traditional assets.

DISCLOSURE AND TRANSPARENCY

The first step in any equitable distribution proceeding is complete and honest disclosure of the assets held by either party. However, cryptocurrency may pose unique challenges regarding disclosure. Cryptocurrency uses alias-based identification, meaning users are identified by unique digital addresses instead of their real names, making it difficult to trace transactions to an individual. Therefore, the identification of cryptocurrency relies almost entirely on the party’s disclosure.

VALUATION OF CRYPTOCURRENCY

Due to the volatile nature of cryptocurrency values, accurate valuation is challenging. In North Carolina, the value of marital property, including cryptocurrency, is determined at the date of separation. However, North Carolina courts also consider divisible property, which can include passive increases or decreases in the value of crypto after the date of separation but before distribution.

Even though the value of cryptocurrency is determined at the date of separation, because its value fluctuates rapidly, even a slight delay between the date of separation and the date of distribution can result in a significant change in its value as an asset.

DIVISION METHODS

Once cryptocurrency has been identified, classified as marital property, and valued, the court must decide how to divide it fairly. Standard methods of division include:

• In-kind division: The cryptocurrency is split between spouses (e.g., each receives half of the Bitcoin or Ethereum holdings)
• Buyout or offset: One spouse keeps the cryptocurrency, and the other receives a corresponding value in another marital asset (e.g., cash or equity)
• Liquidation: The cryptocurrency is sold, and the proceeds are divided

Each method of division has pros and cons:

• In-kind division:
  • Pros:
    • Fairness: Both parties share the risk and reward of future price changes
    • Avoid having to sell the cryptocurrency
    • Keep the asset intact
  • Cons:
    • Requires both parties to have a crypto wallet and a basic understanding of how to use itSecurity risk: Mishandling private keys or wallets can result in permanent loss
    • Volatility: The value can shift dramatically before or after the split
• Buyout or offset:
  • Pros:
    • Only one party needs to handle the cryptocurrency moving forward
    • Avoids both parties needing an understanding of how cryptocurrency works
    • The spouse being bought out receives a stable, immediately usable asset
  • Cons:
    • The spouse keeping the cryptocurrency assumes the risk of post-division volatility
• Liquidation
  • Pros:
    • Clear-cut resolution: converts a volatile asset into a fixed dollar amountEquality in value received by both partiesEliminates the need for ongoing crypto management
  • Cons:
    • Timing risk: Selling during a downturn can lead to a loss in value
    • Loss of investment potential if crypto later appreciates

CHALLENGES IN DIVIDING CRYPTOCURRENCY

While on the surface, the treatment of cryptocurrency in divorce proceedings appears to align with the treatment of other traditional assets, that is not the case. The unique qualities and challenges posed by cryptocurrency necessitate that courts adapt their approach to better address the characteristics that cryptocurrency brings to the table.

LOCATING AND DISCLOSING DIGITAL ASSETS

Because cryptocurrency is linked to anonymous or pseudonymous addresses, it can easily be concealed and challenging to locate. This problem may be exacerbated if the spouse in possession of the cryptocurrency chooses not to disclose it, either purposefully or simply because they do not believe it will be relevant. For this reason, careful discovery efforts by legal and financial experts are key to achieving full financial disclosure, as required by law.

VALUATION COMPLEXITY

While traditional assets may lend themselves to clear-cut valuation methods, cryptocurrency is highly volatile. For this reason, it is challenging to assign a meaningful and reliable value to it for the purposes of equitable distribution. Additionally, the various types of cryptocurrencies may require different valuation methods, adding another layer of complexity to the valuation process.

SECURITY RISKS

Unlike traditional financial assets, cryptocurrency also carries a variety of unique security risks. For example, accessing cryptocurrency requires private keys, which, if lost, render the asset irretrievable. Additional risk arises when cryptocurrency is transferred between spouses.  

LEGAL GRAY AREAS

Cryptocurrency as an asset subject to division in divorce proceedings is a relatively new concept, resulting in limited legal precedent. These uncertainties include how to handle new or emerging cryptocurrencies and what evidence is required to prove ownership or value in court.

PRACTICAL STEPS FOR DIVORCING SPOUSES WITH CRYPTOCURRENCY

Whether you possess cryptocurrency and want to protect your assets, or you are the spouse of an individual who possesses cryptocurrency and wants to ensure full disclosure of all assets, the following factors are important to keep in mind while you navigate the divorce process:

FOR SPOUSES WHO OWN CRYPTOCURRENCY

If you are going through a divorce proceeding and currently hold cryptocurrency, consider the following in order to protect yourself as well as your assets:

• Disclose your possession of the cryptocurrency. North Carolina law requires complete disclosure of all marital assets. Failure to list cryptocurrency as an asset in your possession may result in legal penalties.
• Document all aspects of your possession. Keep a detailed record of items such as wallet addresses, transactions, exchange accounts, and purchase history.
• Secure your access. Ensure that your asset is protected and not easily accessible to unauthorized individuals. However, avoid moving or hiding assets altogether.
• Consult a legal and financial advisor. Ensure that you consult with experts who understand the legal and financial aspects of cryptocurrency, especially in the context of divorce.

FOR SPOUSES WHO SUSPECT HIDDEN CRYPTOCURRENCY

If you are going through a divorce proceeding and believe that your spouse may be concealing the fact that they possess cryptocurrency, acquiring legal assistance to pursue the following options may assist you in disclosing the asset:

• Request detailed financial disclosure. Ensure that your attorney requests complete asset disclosure and specifically requests the disclosure of cryptocurrency.
• Examine financial records. Have your attorney attempt to identify any suspicious activity, such as large cash withdrawals, transfers to unknown accounts, etc.
• Use discovery tools. Hire an attorney who can issue subpoenas in order to access things such as banks or digital wallets and transaction logs.

WHY YOU NEED LEGAL AND FINANCIAL EXPERTS

Divorce and equitable distribution proceedings are often emotionally and financially challenging. When cryptocurrency is involved, the process becomes even more complex due to its unique legal, technical, and financial considerations. To navigate these challenges effectively and protect your interests, it is crucial to work closely with a knowledgeable family law attorney. Additionally, consulting financial experts and tax professionals can help you fully understand your options, assess the value and implications of digital assets, and make informed decisions.

FREQUENTLY ASKED QUESTIONS

CAN CRYPTOCURRENCY BE TREATED AS SEPARATE PROPERTY?

Yes. Several circumstances may result in cryptocurrency being treated as separate property. Under North Carolina law, cryptocurrency will be considered separate property if: (1) it was acquired before the marriage, (2) it was acquired by inheritance or gift to one spouse individually during the marriage, or (3) there is a valid prenuptial or postnuptial agreement that specifically excludes cryptocurrency from classification as marital property.  

However, even if cryptocurrency may have been considered separate property at the outset, some things may cause it to become marital property. This can include “commingling,” which means that the asset is combined in some way with matrimonial assets. This can also include active increases in the value of the asset resulting from the efforts of both spouses and/or the use of marital funds. Additionally, if the cryptocurrency was used for the benefit of the marriage (e.g., selling crypto to fund a down payment on a home), then it may be considered marital by the court.

HOW DO I PROVE MY SPOUSE OWNS CRYPTOCURRENCY?

When conducted by a professional, several legal and investigative tools can be employed to help uncover digital assets. Formal discovery tools such as requests for production of documents, requests for admissions, interrogatories, and subpoenas can serve as essential steps in ensuring that the possession of cryptocurrency is disclosed. Additionally, professional analysis of financial records or digital forensic activity can aid in revealing cryptocurrency and providing the necessary proof of possession.

WHAT IF I DON’T KNOW HOW TO USE CRYPTOCURRENCY?

While you may be unsure about the complexities of cryptocurrency, there are professionals whom you may rely on to assist you in ensuring that you get the most out of your assets. An experienced family law attorney, as well as financial and digital experts, can help you identify, value, understand, and negotiate for your fair share of the cryptocurrency.

HOW SMITH DEBNAM CAN HELP WITH DIVISION OF PROPERTY

At Smith Debnam, our family law attorneys are highly experienced in the complexities of asset division, including the identification, valuation, and distribution of both traditional and digital assets such as cryptocurrency. We are committed to protecting your financial interests and ensuring that you receive an equitable share of the marital estate. Beyond legal strategy, our team offers compassionate guidance to help alleviate the stress and uncertainty that often accompany divorce proceedings, enabling you to move forward with confidence and clarity.