Married millennials, here comes crypto divorce cliff

Divorce always raises thorny questions about how marital assets will be divided. In most cases, the solution is quite simple and requires surgical division between the assets of the two parties; But you can’t do this with the family dog ​​or aquarium. But if you think deciding who gets the dog is complicated, here’s cryptocurrency.

Since the crypto wealth accumulation phase is still new in many households and the recent sharp decline in digital assets bitcoin And ether This situation, which has damaged the confidence of investors, which has reached record levels, shows that the way forward is dark. But for many married Americans, the current price of cryptocurrency doesn’t even register as an issue. This is because assets are easily squirreled away from an unsuspecting spouse.

“Crypto in divorce cases creates the same headaches we have long seen with offshore accounts, but now assets can be moved instantly and invisibly,” said Mark Grabowski, professor of cyber law and digital ethics at Adelphi University and author of several books on cryptocurrencies. The problem, he added, is that ownership is determined not by the name on the account but by who holds the private keys.

“If one spouse controls the purse, they effectively control the assets,” Grabowski said.

Lawyers now need to subpoena exchanges, track transactions on the blockchain, and determine whether funds were purchased before or during the marriage.

“Without this transparency and given the lack of reporting standards, it is easy for one spouse to hide or underreport assets. Courts are still catching up,” Grabowski said.

But in theory, crypto divorce should work like any other. Renee Bauer, a divorce attorney who deals with cryptocurrency splits, says the biggest issue couples fight over is seemingly simple: Who gets the wallet?

“This question opens up a whole host of complexities that the traditional property division has never had to deal with,” Bauer said.

The first challenge is to find out what actually exists.

“The retirement account comes with statements. A house has an address. The crypto may be sitting on an online exchange or in a hardware wallet that one spouse conveniently forgot to mention,” Bauer said.

Tracking it down then becomes part detective work, part digital forensics. Once the identity of the digital asset is authenticated, custody follows.

“Some spouses want to keep the digital wallet intact, especially if they were the ones managing it during the marriage, while others want a clean monetary division,” Bauer said.

The courts are still trying to figure out the best way to handle this.

“There’s also a security piece. If one spouse gives up the private keys, they’re effectively ceding full control. If they refuse, the court has to decide how to implement access,” Bauer said.

He describes seeing a lawyer who didn’t know much about crypto try to give the other spouse credit for the value of Bitcoin in another asset, not realizing it wasn’t that simple or fair.

“Many divorce attorneys are slow to catch up and don’t even request disclosure. In my state of Connecticut, there is no specific place for crypto on financial statements. For some, this could mean the loss of a valuable asset if they are not looking for it,” Bauer said.

Crypto hunters, PIs of the digital asset divorce era

One of the few companies that can help locate a lost asset is BlockSquared Forensics. Ryan Settles, founder and CEO of the Texas-based company, says that the need for his services has increased exponentially since he founded his company in 2023. BlockSquared is dedicated exclusively to the crypto aspects of family law and divorce.

If a spouse (usually women, says Settles) suspects their partner is stashing crypto, their lawyer can call BlockSquared, which does everything from simple asset verification to in-depth investigations to tracking crypto across continents into the murky world of wallets and exchanges. Settles’ company would then present the spouse with a “storyboard” that tracks and timestamps the movement of cryptocurrencies.

Investigating whether a spouse owns cryptocurrency is becoming increasingly common, he says, “especially among high-net-worth individuals going through divorces and high-net-worth individuals.”

Bringing up crypto in divorce will become even more common. Settles noted: Millennials own the highest amount of cryptoand this age group for the next six months We are approaching the peak years of divorcecombined with increasing crypto assets.

Another issue Settles looks at is the spouse’s tax liability, which he ensures is addressed during the divorce.

“There are a lot of tax issues that most people, even lawyers, are not familiar with,” says Settles, adding that the number of taxable events and reporting requirements resulting from a single transaction can come as a surprise to even the most experienced litigators.

“Most lawyers don’t understand this, they don’t understand the terminology. There’s a lot of trust created without verification,” Settles said.

Many of their cases involve spouses who were not only unaware their husbands were involved in cryptocurrency, but also faced a huge tax bill on capital gains when the assets were finally split.

“Unlike a savings account, the value of crypto can swing wildly in a single day,” Bauer said. “Selling crypto to split proceeds can trigger capital gains. Holding it can trigger new arguments when the value changes,” Bauer added.

Relatively relaxed Internal Revenue Service reporting requirements for cryptocurrencies haven’t helped, but they will become stricter starting with the 2025 tax year.

“There are so many pieces. There are so many lawyers nodding and smiling and acting like they understand,” Settles said.

But he said companies like his are usually brought in only when there is a good suspicion that the spouse is hiding significant crypto assets. With a $9,000 deposit fee and investigations that can cost $50,000, Settles says his services often cost more than an attorney.

Tough questions about crypto property splits

Roman Beck, a professor at Bentley University who directs the Crypto Ledger Lab, says that because this field is relatively new, it’s best to look at it not as the digital wallet, but as the courts dividing up the assets the wallet controls.

“The law treats cryptocurrency much less exotic than people think. The starting point is simple: for tax and most property law purposes, cryptocurrency is treated as property, not money,” Beck said.

In divorce, this means that bitcoin, ether, stablecoins, and NFTs acquired during the marriage are often part of the marital property, just like a brokerage account or a second home, and how that property is divided depends on the state.

“Courts don’t divide purses, they divide value,” Beck said.

The real legal question is “Who will get the wallet?” It is not. he said, but ‘How will we share the economic value represented by the wallet and then who will be entrusted with the technical storage?’

This leaves courts and lawyers to do one of three things: split the assets on the chain, sell and split the fiats, or offset them with other assets.

“From a technical perspective, a wallet is often just a set of private keys spread across hardware devices, mobile applications, or even seed statements on a piece of paper. You cannot securely ‘share’ a hardware wallet or private key once it’s been divorced,” Beck said.

Another issue in the crypto divorce is the volatility of the underlying asset; Currency price fluctuations make it difficult for couples to agree on the timing of the split, both as a couple and for digital assets. In the last two months alone, Bitcoin has fallen from a high of over $126,000 to $80,000, a 35% decline, and has seen its year-to-date gains erased, along with many wild daily swings.

If couples are thinking rationally rather than emotionally, one of the simplest solutions would be to split the wallet on a chain to create two wallets for each of the divorced spouses so they can continue to hold their share of crypto, or to draft a legal agreement that gives both parties a share of one wallet.

“They won’t have to sell right away,” Beck said.

However, often one of the parties is not knowledgeable about keeping a wallet and is therefore not satisfied with this solution.

Similar to a jointly owned home that a divorcing couple may not want to put on the market at a bad time, a couple may agree to transfer their crypto assets to a trusted third party to act as agent on behalf of both of them and sell the crypto when the market recovers – when a certain agreed-upon minimum value is reached.

But Beck added that, economically and technically, there is nothing stopping a divorcing couple from holding crypto assets using any of these methods to allocate a legal percentage to each partner and delay liquidation until market conditions improve, but both parties must agree and “most just want it done.”

Blockchain ledger transparency and courts

On the positive side, although crypto is known as a haven of anonymity, other aspects of digital assets come in handy in divorce cases.

“Public blockchains like Bitcoin and Ethereum are transparent ledgers. Every transaction is recorded forever. In other words, on-ledger data analytics turns the blockchain into a very patient financial witness,” Beck said. “If you know how to read the chain, you’re left with a perfect audit trail. … The real frontier is not law, it’s forensics,” he added.

Crypto adoption by many Americans – surveys in recent years gallup And Pew Research It is estimated that 14 percent to 17 percent of U.S. adults own cryptocurrency, forcing family law to become more data-driven.

“The combination of transparent ledgers and powerful analytics gives lawyers and judges better tools to restructure financial behavior than they ever had with cash. The policy question going forward is not whether we can follow through, but how far courts can go in requiring this level of scrutiny in everyday divorces,” Beck said.

However, that doesn’t mean people won’t try to hide their assets. Settles says he usually sees movement on the books within 20 minutes.

“They’ll start shuffling through their assets, moving things, hiding things, moving them into drums. It’s pretty fascinating,” Settles said.

And it’s trackable.