The Rise of Digital Assets in Divorce: Navigating Cryptocurrency, NFTs, and Virtual Property
As technology evolves, so do the complexities surrounding divorce. Today, more couples are facing challenges that didn’t exist even a decade ago. One particularly modern challenge faced by couples in a divorce is the division of digital assets. From cryptocurrency and non-fungible tokens (NFTs) to online businesses, domain names, and digital wallets, these virtual assets often hold significant financial value. Yet, they’re frequently overlooked or undervalued during divorce proceedings.
This rise in digital assets has given rise to some commonly asked questions by couples navigating divorce:
- How are digital assets classified during a divorce?
- Are they considered marital property?
- How can you trace, value, and divide something that doesn’t physically exist?
In this week’s blog, we’ll break down the legal implications of digital assets in divorce, offer guidance for individuals navigating this uncharted terrain, and explore how an experienced divorce attorney can help protect your financial future in high-tech world.
What Are Digital Assets?
Digital assets include any non-physical items stored or traded electronically that hold value. Common types of digital assets that we frequently see during divorce negotiations are: Cryptocurrency, such as Bitcoin and Ethereum; Non-fungible tokens (NFT); Digital wallets and online accounts; domain names and websites; online revenue streams, such as YouTube and TikTok; Virtual real estate in metaverses; and intellectual property stored digitally. As more individuals invest in cryptocurrency or build online empires, these assets are becoming a core component of marital estates, making their proper identification and division crucial during divorce.
Are Digital Assets Marital Property?
In most states, any assets acquired during the marriage, regardless of how unconventional, are considered marital property. This can include digital assets. If one spouse purchased Bitcoin, started an NFT collection, or built a monetized YouTube channel during the marriage, the other spouse may be entitled to a share of that value in the divorce settlement.
The key legal points that your attorney will consider are when the asset was acquired, how the asset was paid-for, and whether or not there was any appreciation in value. If the asset was acquired before the marriage, they can be determined to be separate property, depending on the jurisdiction. However, if the asset was purchased during the marriage, and the asset was funded with martial funds, they may be determined to be marital assets. However, even if the asset was not purchased during the marriage, if its appreciation in value can be attributed to another spouse’s actions, the other spouse may be entitled to a percentage of the value of the digital asset, depending on the jurisdiction. All of this underlines the importance of transparent asset discovery, and the necessity of a financial forensic analysis when you or your attorney feel that there are some digital assets being hidden.
Cryptocurrency: Hidden, Volatile, and Complex
Cryptocurrency can be one of the most hidden, volatile, and complex assets to track down during a divorce proceeding.
Cryptocurrency transactions are recorded on a public blockchain, however, the names/identities of the people buying and selling the digital asset are anonymized. This allows spouses to easily hide assets, or claim that they’ve been lost – leading to claims of secreting assets/marital dissipation. Some spouses may even transfer crypto to third parties or new wallets before divorce proceedings begin.
Keep in mind, though, that crypto markets are notoriously unstable. A Bitcoin worth $60,000.00 today could drop to $40,000.00 next week, or even rise to $100,000.00. This makes accurate valuation and division incredibly difficult. Judges and lawyers must account for this volatility when crafting equitable settlements. Additionally a crypto asset’s valuation may inspire one spouse to sell it for a profit at the time of valuation. Be sure to speak with your attorney if your action has already commenced, as selling a crypto asset mid-divorce proceedings could lead to substantial legal issues for you. If you have sold the asset prior to the commencement and have earned money from the transaction, it may trigger capital gains taxes. An experienced divorce attorney must help clients understand and plan for these tax implications when dividing cryptocurrency.
A logical question that stems from this volatility is when the crypto assets should be valued. Should they be valued at the date of the separation? The date of settlement? Or maybe the date of the trial? These are significant decisions that you should consult with your divorce attorney on, as the choice of valuation date can significantly impact the outcome of the determination of the worth of your crypto assets.
NFTs and Intellectual Digital Property
While cryptocurrency is more widely understood, NFTs present an equally complex issue in modern divorce. NFT’s are digital tokens representing ownership of a unique item, such as artwork, music, or virtual real estate. If one spouse owns a valuable NFT or generates income through digital content (like monetized memes, music or AI-generated art), it could represent a high value marital asset.
Some key challenges that you may face from NFTs are determining their value and ownership rights, as well as whether or not you are licensed to the asset, or just the token representing the asset. Some NFTs offer residual income to the original creator. This ongoing revenue stream may need to be divided or offset in alimony or property division. The answer of whether you have full ownership, or if you are just licensed to possess the crypto asset can dramatically affect its valuation.
Hidden Digital Assets: What to Look For and How to Find Them
Some spouses may attempt to hide their digital assets during a divorce to try and lower their alleged net worth and shield their assets from division. Here are some common red flags to look out for, and some tactics your attorney may use in discovery:
If you see there are sudden financial transfers occurring across marital bank accounts, or large ATM withdrawals, this may indicate that your financial resources are being used for crypto assets. Additionally, be on the lookout for references to “cold storage”, “keys”, “wallets”, or other online accounts that you are not familiar with. Your partner is also likely to be a part of various online discord/reddit servers that surround these same topics, so be on the lookout for any indication that they are a part of these online communities.
In discovery, your attorneys are likely to subpoena cryptocurrency exchange platforms if they suspect that there are hidden digital assets. They will also likely use the services of an experienced financial forensic expert, as they are professionals who can track down blockchain transactions and determine the root of questioned withdrawals. A knowledgeable divorce attorney will understand how to properly pursue and uncover these assets effectively and may even have their own proven method of doing so.
Digital Businesses and Online Income Streams
Many couples today generate income through digital means, such as affiliate marketing, e-commerce shops such as Etsy and Amazon, social media accounts, or YouTube monetization. These income streams can also be treated like a business during divorce. To read our blog on how divorce proceedings may be impacted when one or both spouses own a business, read our blog here.
Some of the commonly factors to consider are brand equity, partnerships and sponsorships, as well as intellectual property. If one spouse has a strong online following, the value of their brand may be divisible between the couple as a part of the divorce. Additionally, if one partner has partnerships and sponsorships, these represent contractual income and should be considered during asset division. Finally, intellectual property, which is often represented by logos, trademarks, and website domains, hold value and must be included in property settlements. In some cases, ongoing revenue may influence spousal support or lead to a buyout agreement, where the spouse keeping the business will “buy out” the other spouse’s vested interest. Consult with your experienced divorce attorney to understand which is the most appropriate for you and your situation.
Protecting Your Digital Interests in a Divorce
Whether you’re the spouse with digital assets, or the one who suspects that digital assets are being hidden, it is essential to work with an experienced divorce attorney who is familiar with digital property. Experienced divorce attorneys often have a series of tactics they rely on to help protect clients’ digital interests during a divorce.
Often, an experienced divorce attorney will start the discovery process early. This is because digital assets can easily be transferred, hidden, or manipulated with just a few clicks. The sooner your attorney initiates discovery, the better you will be set up for equitable distribution.
Similarly, your attorney is likely to tell you to document everything. They will likely tell you to keep a record of cryptocurrency wallet addresses, online account usernames and passwords, purchase histories and transaction logs, and even emails and text messages referencing digital investments. If you have a clear paper trail that refers to digital assets, it will streamline your discussions around the digital assets.
Even with these tactics employed, your attorney is likely to hire specialists if you have substantial digital assets. Forensic accountants, crypto asset tracers, and digital property appraisers can offer insights into your digital assets that your attorneys would not be able to find on their own. This is because while your attorney is an expert on the law, they are not likely to be experts on financial forensic measures. These experts help trace hidden assets and establish fair market value, which your attorneys can then use in litigation.
What Courts Are Saying About Digital Assets
Courts are still catching up with technology and legal precedent around digital assets in divorce is evolving. However, judges increasingly recognize these assets as legitimate marital property. Some courts have ordered the sale and division of cryptocurrency holdings, required spouses to turn over private keys or login credentials; and appointed special masters to oversee equitable digital asset division. Being ahead of the legal curve by working with a tech-savvy attorney can make a huge difference in the outcome of your case.
We're Here For You
The digital revolution has brough incredible innovation and unprecedented complications for divorce. Whether you own crypto, manage a digital side hustle, or suspect your spouse is hiding assets in a blockchain wallet, you need legal representation that understands this evolving landscape.
Our skilled divorce attorneys have the experience necessary to help you understand your next steps. Our office is skilled in conducting thorough discovery to identify hidden virtual assets, as well as collaborating with financial experts to facilitate the discovery and valuation of digital assets, when needed. Using this information, our attorneys can help to structure settlements that account for the volatility of crypto assets and the future income that may be provided by these assets, to protect your rights and help secure your financial future as you enter your next chapter.
At Douglas Family Law Group, PLLC, we fight for what’s most important to YOU during divorce and family law matters. Contact us today, or use our web form to schedule your initial consultation with one of our divorce law experts.
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