The landscape of marital assets is constantly evolving, and perhaps no asset class illustrates this more than cryptocurrency. What was once a niche interest has become a significant component of many investment portfolios. For couples facing divorce in Auburn, Alabama, the presence of Bitcoin, Ethereum, or other digital currencies introduces a layer of complexity that did not exist a decade ago. The process is far more intricate than simply splitting a bank account; it involves unique challenges in identification, valuation, and equitable division.
Is Cryptocurrency Considered Marital Property in Alabama?
The first question that must be addressed in any Auburn divorce involving digital assets is how they are classified. Under Alabama law, the distinction between “marital property” and “separate property” is paramount.
- Marital Property: This category generally includes all assets and debts that were acquired or earned by either spouse during the marriage, up until the final divorce decree is issued.
- Separate Property: This typically refers to assets owned by one spouse before the marriage, or assets received individually as a gift or inheritance during the marriage, so long as they were not commingled with marital funds.
Alabama follows the principle of “equitable distribution.” This means marital property is divided in a manner that is fair, but not necessarily a strict 50/50 split. A judge in the Lee County Circuit Court will consider various factors, including the length of the marriage, each spouse’s contributions (both financial and non-financial), earning capacity, and conduct.
Cryptocurrency purchased with funds earned during the marriage is almost always considered marital property. It does not matter which spouse’s name is on the exchange account or who has possession of the private keys. If marital funds were used to acquire it, it belongs to the marital estate and is subject to equitable division.
Even if cryptocurrency was owned by one spouse before the marriage (making it initially separate property), it could become marital property through commingling. For instance, if pre-marital Bitcoin was sold and the proceeds were deposited into a joint bank account, or if marital funds were used to purchase additional crypto that was stored in the same wallet as the separate crypto, its separate character could be lost.
What Are the Challenges in Locating Hidden Cryptocurrency?
One of the most significant challenges in these cases is the potential for one spouse to hide digital assets. Unlike traditional bank or brokerage accounts, which generate statements and are easily discoverable through subpoenas, cryptocurrency can be held in ways that are difficult to trace.
- Self-Custody Wallets: A spouse can hold cryptocurrency offline in a “cold storage” hardware wallet (like a Ledger or Trezor device) or a software wallet on a personal computer or phone. These are not tied to a third-party institution, making them invisible to standard discovery requests sent to financial institutions.
- Privacy Coins: Certain cryptocurrencies, such as Monero or Zcash, are specifically designed to obscure transaction histories, making them exceptionally difficult to trace on the blockchain.
- Multiple Exchanges and Wallets: An individual can spread assets across dozens of different online exchanges and countless personal wallets, creating a complex web that is hard to unravel.
The process of uncovering these assets, often called forensic discovery, is a meticulous one. It may involve:
- Reviewing bank and credit card statements for transactions with cryptocurrency exchanges (e.g., Coinbase, Binance, Kraken).
- Analyzing tax returns, as the IRS requires the reporting of cryptocurrency transactions.
- Issuing subpoenas to known cryptocurrency exchanges for transaction histories.
- Employing forensic accountants or blockchain investigators who can trace transactions on the public ledger and potentially link anonymous wallets to an individual.
Failing to disclose assets, including cryptocurrency, during a divorce is a serious offense with severe penalties. If hidden assets are discovered, a judge can award a larger portion, or even all, of those assets to the other spouse and may also require the non-disclosing party to pay the other’s attorney fees.
How Are Digital Currencies Valued for a Divorce?
Once identified, the next major hurdle is valuation. The value of cryptocurrencies is notoriously volatile, with prices capable of swinging dramatically in a single day. This creates a significant problem for divorce proceedings, which require a clear valuation date to divide assets equitably.
Will the assets be valued on the date of separation, the date of filing for divorce, or the date of the final trial? There is no single required answer in Alabama, and the parties must agree on a date, or the court will decide. This decision can have a massive financial impact. A Bitcoin portfolio valued at $100,000 on the filing date could be worth $150,000 or $50,000 by the time the divorce is finalized.
To manage this, several approaches can be taken:
- Stipulating a Valuation Date: Both parties can formally agree on a specific date to value the assets, accepting the risk of market fluctuations after that point.
- Using Averages: Some may agree to use a 30-day or 60-day average value to smooth out daily volatility.
- In-Kind Division: Instead of assigning a dollar value, the court can order the cryptocurrency itself to be divided “in-kind.” For example, if a marital portfolio contains 2 Bitcoin, the court can order that each spouse receives 1 Bitcoin, regardless of its dollar value on the day of transfer. This method ensures both parties share equally in future gains or losses.
The complexity of valuation is similar to other hard-to-value assets, like a new business. Just as one might ask what happens if I start a business before my divorce is final, valuing a volatile crypto portfolio requires careful timing and often the input of financial professionals.
How Does a Lee County Court Divide a Crypto Portfolio?
After a cryptocurrency portfolio has been identified, classified as marital property, and valued, the Lee County Circuit Court must decide how to divide it equitably. As noted, this does not always mean an equal 50/50 split. The court has several methods at its disposal.
- In-Kind Transfer: This is often the cleanest method. The court orders a direct transfer of a percentage of the digital coins from one spouse’s wallet to the other’s. For example, if the marital estate holds 10 Ethereum, the court could order 5 ETH to be transferred to the other spouse. This requires the receiving spouse to set up their own secure wallet.
- Liquidation and Division: The court may order the spouse holding the cryptocurrency to sell all or a portion of it and divide the cash proceeds. This provides a clean break but can trigger significant capital gains taxes, which must be accounted for in the settlement.
- Asset Offset: This is a common approach when one spouse wishes to retain the entire crypto portfolio. The court awards the full value of the cryptocurrency to one party and “offsets” it by awarding the other spouse marital assets of equivalent value, such as a larger share of the home equity, retirement accounts, or other investments.
The chosen method will depend on the specifics of the case, the nature of the crypto assets, the wishes of the parties, and potential tax consequences.
What Are the Tax Implications of Dividing Cryptocurrency?
The tax implications of dividing cryptocurrency cannot be overlooked. The IRS treats cryptocurrency as property, not currency. This means that selling it or exchanging it for another crypto is a taxable event, subject to capital gains tax.
- Transfer Incident to Divorce: Generally, a direct transfer of cryptocurrency from one spouse to another as part of a divorce settlement is not a taxable event. The spouse receiving the assets also receives the original cost basis.
- Sale and Division: If the court orders the assets to be sold and the proceeds divided, this sale triggers a capital gains event. The marital estate will be responsible for the taxes on any appreciation in value from the time the crypto was purchased to when it was sold. This tax liability should be factored into the equitable distribution.
For example, if a marital Bitcoin was purchased for $10,000 and is sold for $50,000 during the divorce, there is a $40,000 capital gain. The taxes owed on this gain reduce the net proceeds available for division. Failing to account for this can leave one or both parties with an unexpected and substantial tax bill.
How Can You Protect Your Digital Assets in an Auburn Divorce?
If you are entering a divorce in Auburn and you or your spouse holds cryptocurrency, proactive steps are necessary to protect your financial interests.
- Full Disclosure: Be transparent with your attorney about all known digital assets from the very beginning. Attempting to hide assets will likely backfire and damage your credibility with the court.
- Gather Documentation: Collect any records you have related to cryptocurrency transactions. This includes statements from exchanges, bank records showing fund transfers, and tax filings.
- Preserve the Assets: Do not sell, transfer, or gift any cryptocurrency after the divorce process has begun without a court order or a written agreement from your spouse. Doing so can be seen as dissipating marital assets, which carries heavy penalties.
- Secure Private Keys: Ensure you have access to all wallets. If your spouse is the only one with the passwords or private keys, there is a risk of being locked out of your own assets.
- Work with Knowledgeable Professionals: Your divorce attorney should have experience handling cases with complex digital assets. It may also be necessary to engage a forensic accountant or a valuation professional who is familiar with the cryptocurrency market.
Navigating the division of a cryptocurrency portfolio requires a blend of legal acumen and technical knowledge. Ensuring a fair and equitable outcome depends on a thorough and informed approach.
Talk with an Auburn, AL Divorce Attorney
The rules governing property division in a divorce were written long before Bitcoin was invented. If you are facing a divorce in Auburn or Lee County and digital assets are part of your marital estate, it is important to have legal representation that is prepared to address these modern financial challenges. The team at Alsobrook Law Group is committed to helping clients navigate all aspects of property division, from traditional accounts to complex digital portfolios. We work to ensure all assets are properly identified, valued, and equitably divided.
Contact us today at 334-737-3718 to schedule a consultation to discuss your case.
Frequently Asked Questions About Cryptocurrency in an Alabama Divorce
What if my spouse bought Bitcoin with money from an inheritance?
If your spouse used funds that were clearly their separate property (like an inheritance that was never deposited into a joint account) to buy cryptocurrency, and kept that crypto in a separate wallet, it may be considered their separate property. However, if the value of that crypto increased due to active management during the marriage, the increase in value could be deemed marital property.
Can a court force my spouse to give me their passwords or private keys?
Yes, as part of the discovery process in a divorce, a court can order a spouse to provide all information necessary to access and value marital assets, including passwords, private keys, and hardware wallets. Refusing to comply with a court order can result in serious sanctions.
My spouse claims their crypto is worthless now. What can I do?
The value of cryptocurrency is volatile, but a claim that it is “worthless” must be verified. Through discovery, you can obtain transaction histories to see what was purchased and when. A forensic analysis can trace where the assets went. Even if the value has dropped, the remaining assets are still subject to division.
What happens to cryptocurrency earned from staking or mining during the marriage?
Cryptocurrency acquired through staking rewards or mining activities during the marriage is generally considered marital property. It is a form of income or asset generation that occurred during the marital partnership and would be included in the estate for equitable division.
How do I receive my share of cryptocurrency if I’ve never used it before?
If you are awarded a portion of a crypto portfolio “in-kind,” you will need to set up your own account on a cryptocurrency exchange (like Coinbase or Kraken) or create a secure digital wallet. Your attorney can guide you on the steps required to securely receive the transferred assets.
