Property Division and Bitcoin: How the Court Handles Digital Money
When it comes to getting an efficient, streamlined divorce, property division can be one of the biggest hurdles. Even if emotions aren’t running hot, the process, itself, is still daunting, requiring the classification, value, and distribution of everything a couple owns.
Unfortunately, this herculean task only becomes that much more exciting, when cryptocurrency is on the table.
Cryptocurrency (such as bitcoin) is a form of digital money—one with no tangible form, which exists entirely online, and is specifically designed for maximum privacy and discretion. All of these things making it a really unique (often frustrating) asset to divide, during divorce.
Here’s what you need to know about property division and bitcoin, how California courts handle these assets, and what Provinziano can do to help you navigate the tangled complexities of digital currency.
What is Cryptocurrency?
First off, let’s get down with a definition.
Cryptocurrency (also known as “bitcoin,” “digital gold,” and—our personal favorite— “magic internet money”), is a term used to describe a number of different online payment systems, which are used to buy physical goods and services online.
While these digital currencies are a legitimate form of payment, this is one type of currency you’re never actually going to see in person. That’s because cryptocurrency doesn’t (technically) exist… well… in a physical form, anyway.
Instead, the value of digital money is represented only as numbers on a screen. This information is housed in an online “wallet,” which breaks down transactional history, and stores it in “blockchains”—chunks of information separated into “blocks,” which cannot be strung together in a “chain” without a code. To access information, you’ll need a private “key” and password (rather than any personally identifying information).
While it’s a bit complex, cryptocurrency’s unique, blockchain design offers consumers a lot of attractive benefits.
The Benefits of Cryptocurrency
- Private and Secure—blockchains, along with the lack of any personally identifying information, means that your financial decisions are much more secure, anonymous, and private.
- Faster—since transactions are handled exclusively online, digital coin transactions aren’t beholden to regular business hours. Instead, payments can be initiated and executed on your timeline, without any delay.
- Flexibility—without the restrictions that come with a physical location, digital payments can be made and received to and from anywhere around the world, at a fraction of the cost.
- Cost-Efficient—by cutting out the middleman, cryptocurrency effectively bypasses the need for the steep transaction fees often required by traditional, brick and mortar banks.
- Economic Stability—while cryptocurrency values can fluctuate, digital owners don’t have to worry about the whims and turmoil of an international market inflating costs or availability of their product
All of these points make digital investments like Bitcoin an attractive option for couples looking to branch out. However, it can also cause a lot of unique headaches, if you ever get divorced.
Property Division and Cryptocurrency: Dividing Digital Assets During Divorce
A lack of physical form never stopped anything from being considered property—just ask anyone with a lucrative, intellectual property idea. In this regard, bitcoin is no different, and is subject to the same division process as everything else you own.
In California, that property division is done by applying community property rules; a process that requires the court to follow these four steps:
- Identify property
- Characterize property
- Value property
- Divide property
This simplification might make property division sound easy; but the truth is, it’s anything but—especially for an asset like bitcoin.
Here’s a closer look at how property division applies to bitcoin, and why it’s a bit more complex than other assets.
Step 1: Identifying Property
The first step to dividing bitcoin, is to identify it—or, in other words, acknowledge its existence.
This step is fairly simple, so long as both spouses are aware that a cryptocurrency wallet was created, and, of course, so long as each has access to the proper key and password. If not, however, then things get more interesting.
Remember, cryptocurrencies are specifically designed to keep transactions secure and private. Not only does this mean no names, it also means no central database. This autonomy and privacy is great for when you want to keep transactions secure. However, it also makes bitcoin a popular “go to” for scumbag spouses trying and hide assets from divorce court.
If you suspect your partner of hiding digital assets, then here are a few tips to help you locate what you need:
- Include specific reference to cryptocurrency on your financial inventory.
- Review bank records for transactions to cryptocurrency companies.
- Analyze tax records for cryptocurrency references.
- Subpoena cryptocurrency records and documents;
- Search computers, cell phones, and external hard drives for cryptocurrency information.
- Ask about cryptocurrency during testimony.
Best case scenario, your spouse will be forthcoming, and won’t have a problem handing over the information. If not, you may need to involve a financial investigator experienced in tracking down this type of information.
Step 2: Characterizing Property
Assuming your cryptocurrency can be properly identified, the next step will be to label it as either separate or marital property. This is done by applying the rules of community property.
Under these guidelines, anything that either spouse acquired during marriage, belongs to both, equally—regardless of whose name it’s in. These jointly held assets are called “marital property,” and are subject to division, upon divorce. On the other hand, whatever you acquired before marriage is considered separate property, and will leave with you, outright, upon divorce.
When applied to bitcoin, this means that whatever amount you purchase prior to getting married (along with its increased value) belongs to you, outright. If acquired during marriage, however, then its value will need to be divided.
Unfortunately, real life is rarely that straightforward; especially since most couples don’t keep a paper trail of their pre-marriage investments. Instead, they mix accounts, share funds, and intermingle assets so thoroughly, that pretty soon it’s impossible to decipher where separate property ends and marital begins.
In these situations, your judge may have to rule that the property was “commingled,” and subject it to the same division as other marital assets.
Step 3: Valuing Property
The third step to dividing bitcoin during divorce is to assign it a value, and here is where we come up against one of cryptocurrency’s biggest downsides: fluctuating value.
While digital money might be immune to the instabilities of a few, localized economies, that doesn’t necessarily mean it’s immune to shifting values, altogether. And, unfortunately, the value of this payment system is constantly changing. This means that what you put into it might not necessarily be what you get out of it…
In California, the worth of digital assets (like bitcoin) are determined at the time of your divorce—not based on the amount you originally invested. Hence, depending on how things line up, you may get more than you put in—a lot more—but you could just as easily get less.
To make sure that amounts are as accurate as possible, judges will typically hold off valuing bitcoin as closely to settlement (or trial) dates as possible.
Step 4: Dividing Property
After your cryptocurrency has been identified, characterized, and valued, your judge will factor its value in with the rest of your property, and—unless you have a valid prenuptial agreement—divide it according to community property rules.
In a community property jurisdiction, the goal is to divide assets equally between spouses; however, that doesn’t mean you have to divide the bitcoin, fifty-fifty. Instead, you can negotiate your own terms, and come up with an arrangement that results in both of you getting half of your property’s overall value.
That being said, if you wanted to go for a fifty-fifty split, cryptocurrency actually works pretty well for that kind of arrangement.
So long as you divide the bitcoin, itself, into equal shares (rather than trying to pinpoint exact values), each spouse can walk away from the marriage knowing that their portion is equitable, regardless of how the market might shift between valuation and trial.
Do You Need Help with Property Division for Bitcoin Investments?
Property division is complex, high stakes process—one that becomes more stressful, once assets like bitcoin are involved. That’s why it’s so important to have an attorney who understands these complex financial issues.
For more questions about property division and bitcoin in California, we want to hear from you. Call Provinziano & Associates at (310) 237-6179, or get in touch online, and together, we can make sure you get your fair share of this valuable digital asset.