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How Does Crypto Currency Work In My Divorce Case?

ByThe Spence Law Firm Nov. 28, 2020

Bitcoin, Ethereum, Tether, and other cryptocurrencies are rapidly gaining favor for use in electronic commerce and as investments, so they are starting to pop up in divorce cases in Orlando. Yet virtual currencies (or cryptos) remain largely unregulated and some seem just a bit shady. Cryptocurrency was and is utilized by some criminals due to its anonymous nature; it can be hard to track down and easy to hide and move around. This means that unscrupulous divorce litigants could potentially hide assets by purchasing bitcoins then squirrelling the coins away in secure online storage and not revealing them as required. Even in an honest divorce where all assets are disclosed, ownership of bitcoin and other cryptocurrencies raises new and novel issues for Florida divorce courts.

What is Cryptocurrency like Bitcoin?

All cryptocurrency has two parts to it:

  1. The actual cryptocurrency itself, usually called “coins” or “tokens,” and

  2. The “blockchain” that records cryptocurrency transactions.

Crypto is not actually a currency in the traditional meaning. Instead, bitcoin and other cryptos are strings of computer code that act as an electronic peer to peer payment system. This means there is no third-party government entity, like the Federal Reserve or other central banks, involved in the transaction.

What is the Blockchain and How Does It Work?

The blockchain is essentially a public ledger system to track cryptocurrency transactions. All crypto transactions are recorded in the blockchain and partitioned into an electronic “block.” Blocks are then connected to other blocks to form a “chain” of infinite blocks, although bitcoin are theoretically limited to 21 million coins. Security of the blockchain is protected because the only way to change a particular block in the chain is to first change all blocks that are in the path to the block to be edited. In other words, a person can’t just randomly edit one block in the blockchain, they would have to edit a string of blocks so any changes to the blocks can be identified and traced to the responsible party.

The Bitcoin Wallet

All owners of crypto have an “electronic wallet” to hold their coins. Each electronic wallet has a “public key” and a “private key.” Each key has a unique number assigned to it. The public key is used to make sure that all transactions are secure; however, the identity of the owner is not disclosed in the transaction, only the public key. The identify of the owner of the crypto can only be identified by opening the electronic wallet with the private key, which is known only to the owner. So bitcoin transactions are essentially anonymous electronic transactions.

The Government’s View on Cryptocurrency

With the technical information out of the way, let’s look at how bitcoin and other cryptos are classified by the federal government.

  • In 2013, the US Treasury defined bitcoin as a “convertible decentralized virtual currency.”

  • In 2014 the IRS issued Notice 2014-21, which established guidelines for taxation of virtual currency transactions and reporting requirements.

  • In 2015, bitcoin was determined to be a commodity by the US Commodity Futures Trading Commission.

  • In 2019, the IRS issued Revenue Ruling 2019-24, which addresses common questions and requires disclosure of virtual currencies on a special form.

The IRS considers bitcoin and other cryptocurrency as property that must be valued in dollars.

Florida Law on Cryptocurrency in Divorce

The only Florida case to discuss bitcoins or other cryptocurrency is State v. Espinoza, 264 So.3d 1055 (Fla. 3d DCA 2019). Espinoza is a criminal case, not a divorce case, in which the defendant ran an online bitcoin exchange, but failed to obtain the necessary licenses and approvals from the state to operate a “money services business.” He was charged with running an unlicensed money services business and money laundering after selling large amounts of bitcoin to an undercover detective in Miami, who came in contact with Espinoza by finding his website online. The defendant filed a motion to dismiss the charges, arguing that bitcoin transactions were not “money” and were not “financial transactions” as they did not involve government third parties. The trial court agreed and granted the motion to dismiss, but on appeal the decision was reversed as the definition of “financial transactions” in the statute was broad enough to include bitcoin.

Although not mentioned in the case, as a result of an administrative proceeding, Coinbase was previously issued a license to operate in Florida as a money services business in 2015. In re Coinbase 2015 WL 12867984 (Fla. Dept. Fin. Svcs. Nov. 13, 2015), Coinbase is one of the largest bitcoin exchanges in the world so if the state had already determined that cryptocurrency fit within the moneys services business umbrella, then the defendant in Espinoza didn’t have a chance. The case does highlight an important fact about cryptocurrency: most of the statutes that the government is seeking to apply were written years before cryptocurrency was created.

In terms of an application to divorce cases, Florida courts will likely follow the IRS definition that bitcoin and other cryptos are property, measured in terms of dollars. The equitable distribution of property in divorce cases required by Florida Statutes section 61.075 requires that all assets must first be identified. Bitcoin transactions themselves do not have receipts or statements like a bank account and as discussed above, are anonymous. But a standard request in a request for production of documents should include a request for all cryptocurrency owned or controlled by a spouse and an interrogatory asking for details of crypto purchases. Ownership or trading of cryptocurrency may be used as the basis to seek imputed income in a family law case.

Valuing Cryptocurrency as Property in Divorce

An additional wrinkle comes in respect to valuing bitcoin and other cryptos. The market has demonstrated that crypto is one of the most volatile investment vehicles out there, with prices rising and falling thousands of dollars per coin, per day. Property in Florida divorce cases must be valued as of the date of marriage and as of the date of filing the petition for dissolution of marriage (unless the court chooses a different date for valuation). The problem is there is no “official” exchange rate for bitcoin or other cryptos. There are several private exchanges, like CoinBase, that act as an intermediary and post values. But other private exchanges use different values, as the value of a bitcoin is determined by the market, or what a willing buyer will pay a motivated seller. As an example, in the three months prior to the date of this original blog post (December 2019), bitcoin was valued on coinbase as high as $10,351 per coin and as low as $7,041, so you can see the difficulty here. Current values of Bitcoin in January 2022 are now between $33,000 and $45,000 for the month. Wow.

If bitcoin and other crypto is a significant asset in your divorce case, it may be a good idea to retain an expert witness experienced in the area who can explain to the court what crypto is, how it works, and can identify and trace any crypto purchases made during the marriage.

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