Divorce and Dividing Cryptocurrencies in Colorado

As digital assets like Bitcoin and Ethereum continue to gain popularity, it’s crucial for spouses and legal professionals to understand how these cryptocurrencies factor into the divorce process. At Goldman Law, we recognize the unique challenges that cryptocurrencies present in divorce cases and are committed to providing our clients with sound guidance through this evolving terrain.

Understanding Cryptocurrency in the Context of Divorce

Cryptocurrency, often referred to as “crypto,” is a form of digital or virtual currency that can be used for real transactions while being secured through cryptography and pseudonyms. These currencies run on “blockchains,” which are digital public ledgers distributed throughout a network. Because of this, cryptos are decentralized currencies, unlike conventional currencies that are issued and maintained solely by governments.

This decentralization and private nature of crypto transactions can make these assets particularly tricky to handle in divorce proceedings.

In Colorado, as in many other states, all marital property is subject to equitable distribution during a divorce. This means that any cryptocurrencies acquired during the marriage could be considered marital property and thus subject to division. However, the unique characteristics of cryptocurrencies present several challenges.

Challenges in Dividing Cryptocurrencies

Dividing cryptocurrencies in a divorce presents unique challenges that both parties and their legal representatives must navigate:

• Tracing issues: While blockchain technology provides a record of all transactions, linking these transactions to specific individuals can be complex. This can make it difficult to determine which cryptocurrencies are marital property and which are separate.
• Accessibility: Cryptocurrencies are often stored in digital wallets protected by private keys. If one spouse controls these keys, accessing the assets can be problematic.
• Hidden assets: The pseudonymous nature of cryptocurrencies can make them a tool for dishonest spouses to hide assets. Uncovering hidden crypto assets often requires specialized forensic accounting techniques.
• Valuation difficulties: The highly volatile nature of cryptocurrencies can make it challenging to determine their fair value. Prices can fluctuate significantly even within a single day. Courts and divorcing couples often need to agree on a specific valuation date or method to ensure fairness.
• Tax implications: The IRS treats cryptocurrencies as property for tax purposes. This means that transferring cryptocurrencies as part of a divorce settlement could trigger capital gains taxes, which need to be considered in the overall settlement.
• Technical complexity: Many judges and attorneys may not be well-versed in the technical aspects of cryptocurrencies, which can lead to misunderstandings or oversights in the division process.

How Cryptocurrency Can Be Used to Conceal Assets in Divorce

Because cryptocurrency is highly secure, somewhat anonymous, and relatively new, it is an attractive option for spouses attempting to hide assets during divorce proceedings. Many people, including some legal professionals, lack a thorough understanding of how digital currencies work, making it easier for assets to go undetected. This knowledge gap creates opportunities for dishonest parties to potentially conceal significant portions of marital wealth.

These are some tactics that a deceptive spouse might use to hide crypto assets:

• Gradually transferring funds into cryptocurrency over time to avoid raising suspicion
• Using multiple exchanges and wallets to spread out holdings
• Purchasing cryptocurrency through peer-to-peer platforms that may be harder to trace
• Converting assets, such as vehicles or jewelry, into cryptocurrency before divorce proceedings begin.

These methods mirror traditional asset concealment strategies, like selling valuable items to friends at artificially low prices with plans to repurchase later. However, the decentralized and pseudonymous nature of many cryptocurrencies can make them even more challenging to uncover.

The stakes are particularly high in equitable distribution states like Colorado, where marital assets are not necessarily split 50/50. In these jurisdictions, one spouse may be entitled to a larger share of marital property based on various factors. Concealing cryptocurrency holdings could therefore have a significant impact on the final settlement.

To combat potential concealment, it’s crucial for divorcing spouses and their legal representatives to be aware of cryptocurrency’s role in modern finances. Thorough investigation of financial records, digital footprints, and unusual transactions is essential to ensure a fair and equitable division of all marital assets, including those held in digital form.

Colorado’s Approach to Dividing Cryptocurrencies in Divorce

Colorado follows the principle of equitable distribution when it comes to dividing marital property in a divorce. This means that the court aims to divide property fairly, though not necessarily equally. When it comes to cryptocurrencies, Colorado courts treat them as they would any other investment asset.

Here’s how the crypto asset division would be conducted:

1. Disclosure: Both parties are required to disclose all assets, including any cryptocurrencies, as part of the divorce proceedings. This is typically done through financial affidavits and discovery processes.
2. Valuation: The cryptocurrencies need to be valued. Given their volatility, this often involves agreeing on a specific date for valuation or using an average value over a set period.
3. Classification: The court determines whether the cryptocurrencies are marital property (acquired during the marriage) or separate property (acquired before marriage or through inheritance or gift).
4. Division: If classified as marital property, the court will decide how to divide the cryptocurrencies equitably between the spouses.

Remember that “equitable” doesn’t always mean a 50/50 split. The court considers various factors when determining how to divide assets, including each spouse’s economic circumstances, contributions to the marriage, and future financial needs.

Strategies for Handling Cryptocurrencies in Colorado Divorces

If your divorce involves any cryptocurrency, it’s crucial to approach the asset division with careful planning and expert guidance. Here are some strategies that can help:

• Full disclosure: Both parties should provide complete and accurate information about their cryptocurrency holdings. This includes not just the current holdings but also any past transactions that might have impacted the marital estate.
• Expert valuation: Consider hiring a cryptocurrency expert to provide an accurate valuation of the assets. This can help ensure that both parties have a clear understanding of the value being divided.
• Agreement on valuation date: Given the volatility of cryptocurrencies, agreeing on a specific date for valuation can help avoid disputes. This could be the date of separation, the date of filing for divorce, or another mutually agreed-upon date.
• Factoring tax implications: Work with a tax professional to understand the potential tax consequences of transferring or liquidating cryptocurrencies as part of the divorce settlement.
• Forensic analysis: If there are concerns about hidden assets, a forensic accountant with experience in cryptocurrencies can help trace transactions and uncover any attempts to conceal assets.
• Creative division strategies: Instead of trying to divide the cryptocurrencies themselves, consider alternatives such as one spouse keeping the crypto assets in exchange for other marital property of equivalent value.
• Post-divorce management plan: If both parties decide to retain cryptocurrency assets, develop a clear plan for how these assets will be managed post-divorce, including agreements on when and how they might be liquidated.

Legal and Ethical Considerations

When dealing with cryptocurrencies in divorce, each spouse is expected to adhere to legal and ethical standards:

• Duty of disclosure: Colorado law requires full and honest disclosure of all assets in divorce proceedings. Failing to disclose cryptocurrency holdings can lead to serious legal consequences, including potential charges of fraud.
• Ethical obligations: Attorneys have an ethical obligation to ensure their clients provide complete and accurate information about their assets, including cryptocurrencies.
• Contempt of court: If a spouse is found to have hidden cryptocurrency assets, they may be held in contempt of court, punishable with fines, attorney fees, and even jail time in severe cases.
• Modification of settlement: If undisclosed cryptocurrencies are discovered after the divorce is finalized, the settlement may be subject to modification, potentially leading to a reopening of the case.

The Role of Legal Representation

Given the complexities involved in dividing cryptocurrencies during divorce, having experienced legal representation is crucial. At Goldman Law, we stay abreast of the latest developments in both family law and cryptocurrency regulations. Our approach includes:

• Comprehensive asset discovery: We employ thorough discovery processes to ensure all cryptocurrency assets are identified and properly valued.
• Expert collaboration: We work with financial experts, including cryptocurrency specialists and forensic accountants, to accurately trace and value digital assets.
• Strategic planning: We develop tailored strategies for each client, considering the unique aspects of their cryptocurrency holdings and overall financial situation.
• Negotiation and litigation: Whether through negotiation or litigation, we advocate for our clients’ interests, ensuring a fair division of all assets, including cryptocurrencies.
• Education: We take the time to educate our clients about the implications of cryptocurrency in their divorce, empowering them to make informed decisions.

FAQs About Divorce and Dividing Cryptocurrencies in Colorado

What happens if my spouse tries to hide cryptocurrency assets during our divorce?

Hiding assets, including cryptocurrencies, during a divorce is illegal in Colorado. If you suspect your spouse is hiding cryptocurrency assets, there are several steps you can take:

• Legal discovery: Your attorney can use legal discovery processes to request detailed information about all financial accounts, including cryptocurrency wallets and exchange accounts.
• Bank record analysis: With the help of a financial professional and an attorney, you may find bank records that reveal transfers to cryptocurrency exchanges, indicating undisclosed holdings.
• Forensic analysis: You can hire a forensic accountant or cryptocurrency expert to trace transactions and potentially uncover hidden assets.
• Subpoenas: When suitable, the court may issue a subpoena to cryptocurrency exchanges to obtain records of transactions and holdings.

If hidden cryptocurrencies are discovered after the divorce is finalized, you may be able to petition the court to reopen the case and modify the settlement. The spouse who hid the assets could face serious legal penalties, such as fines or even jail time.

It’s crucial to work with an experienced divorce attorney who understands the complexities of cryptocurrency if you suspect your spouse may be hiding these assets.

Can I keep my cryptocurrencies private during a divorce in Colorado?

While privacy is a key feature of cryptocurrencies in general, attempting to keep your cryptocurrencies private during a divorce in Colorado is not advisable.

In Colorado, as in all states, both parties in a divorce are required to provide full and accurate disclosure of all assets, regardless of how they’re held. This includes cryptocurrencies. Failing to disclose cryptocurrency holdings can be considered fraud and may result in penalties from the court.

If you have concerns about privacy, discuss these with your attorney. They can advise you on how to properly disclose your cryptocurrency holdings while still maintaining as much privacy as possible within the bounds of the law.

Remember, while the blockchain itself is public, your personal information can still be protected to some extent. Your attorney can help ensure that sensitive information, such as private keys or wallet addresses, is not made public during the divorce proceedings.

How are taxes on cryptocurrencies handled in a Colorado divorce?

The tax implications of cryptocurrencies in a Colorado divorce can be complex and should be carefully considered when dividing assets. Here are some key points to take into account:

• Capital gains: If cryptocurrencies are sold or transferred as part of the divorce settlement, this could trigger capital gains taxes. The tax is calculated based on the difference between the purchase price (cost basis) and the value at the time of transfer or sale.
• Tax basis: The spouse receiving the cryptocurrency in the divorce settlement typically takes on the original tax basis. This means they would be responsible for any capital gains taxes when they eventually sell the asset.
• Like-kind exchanges: Unlike some other types of property, cryptocurrencies are not eligible for like-kind exchanges under current tax law. This means you can’t avoid capital gains taxes by exchanging one type of cryptocurrency for another.
• Record-keeping: It’s crucial to maintain detailed records of all cryptocurrency transactions including purchases, sales, and transfers, as these will be necessary for accurate tax reporting.
• Future tax liabilities: When dividing cryptocurrencies, consider not just their current value but also any potential future tax liabilities. This can affect the overall fairness of the asset division.
• Professional advice: It’s wise to consult with a tax expert, in addition to your divorce attorney, who has experience with digital assets, given the intricacy of bitcoin taxation.

Tax laws regarding cryptocurrencies are still evolving, so it’s important to stay informed about the latest regulations. With an attorney’s help, you can craft a divorce settlement that clearly outlines who is responsible for any tax liabilities related to cryptocurrency assets.

At Goldman Law, we work closely with tax professionals to ensure that all aspects of cryptocurrency division, including potential tax implications, are thoroughly addressed in your divorce settlement. Our goal is to help you make informed decisions that protect your financial interests both now and in the future.

Dividing Cryptocurrencies in a Divorce Can Get Complex. Let Goldman Law Help.

As cryptocurrencies continue to evolve and gain mainstream acceptance, their role in divorce proceedings is likely to become increasingly significant. We at Goldman Law stay at the forefront of these developments, ensuring that our clients receive the most up-to-date and effective representation in their divorce cases involving cryptocurrencies.

If you’re facing a divorce in Colorado and have concerns about your cryptocurrency holdings or those of your spouse, don’t hesitate to reach out to us. Our experienced divorce attorneys are here to guide you through the process, protect your interests, and help you achieve a fair resolution. Contact us today at (303) 656-9529 to schedule a consultation.