Crypto And Digital Assets In Divorce: Disclosure, Tracing, And Valuation

Does Cryptocurrency Get Divided In A California Divorce?

Crypto currency can feel different from other property. It lives in digital wallets and on exchanges, its price can move dramatically in a single week, and one spouse often understands it far better than the other. In a California divorce, though, digital assets are property like any other. In one California appellate case, a husband used community funds to buy more than a thousand bitcoins, and the court treated them like any other community asset: it found them to be community property and ordered them divided evenly between the spouses, along with the additional cryptocurrency they had generated. That same case, as the rest of this article shows, is also California's leading cautionary tale about concealing crypto.

What makes digital assetsgenuinely different is not how they are classified. It is the three practicalproblems they raise: disclosing them properly, accounting for them when theymove or disappear, and putting a value on an asset that never stops moving.

What Are Your Disclosure Obligations?

California imposes remarkably broad financial disclosure duties on divorcing spouses. Under the Family Code, spouses stand in a fiduciary relationship that imposes "a duty of the highest good faith and fair dealing on each spouse," subject to the same rights and duties as nonmarital business partners, including rendering, on request, true and full information about transactions concerning community property. A full and accurate disclosure of all assets and liabilities must be made in the early stages of the case, together with a continuing duty to "immediately, fully, and accurately update and augment" those disclosures as things change. These duties do not end at separation. As the courts have put it, the disclosure statutes impose "wide-ranging duties to disclose and account for the existence, valuation, and disposition of all community assets from the date of separation through final property division."

Digital assets are squarely covered, and listing a number on a schedule is not always enough. In the bitcoin case mentioned above, the husband's disclosure schedules listed his 1,062.21 bitcoins, but he failed to reveal that he had bought them through friends acting as proxies and that nearly half were trapped in a bankrupt overseas exchange. Withholding those material facts breached his fiduciary duty even though the bitcoins themselves appeared on paper.

Timing matters, too. Automatic restraining orders in the divorce summons, which bind the filing spouse the moment the petition is filed and the other spouse the moment it is served, prohibit both spouses from "transferring, encumbering, hypothecating, concealing, or in any way disposing of" any property without the other spouse's written consent or a court order, except in the usual course of business or for the necessities of life. Buying crypto with community funds or shuffling coins between wallets while the case is pending can violate those orders, as the husband in the bitcoin case learned when the court found his purchases, made a few months after he was served, violated the restraining order.

What Happens When A Spouse Hides Digital Assets?

Some spouses assume cryptocurrency is easy to hide. California law takes concealment seriously, and courts have effective remedies when it happens.

When a spouse breaches the fiduciary duty by concealing a community asset in a way that impairs the other spouse's one-half interest, the court must see to it that the wronged spouse receives their 50 percent share of that asset, or its value, plus attorney's fees and court costs. The concealing spouse cannot keep what the concealment tried to capture. Where the court expressly finds, on clear and convincing evidence, that the concealment amounted to fraud, oppression, or malice, the remedy rises to 100 percent of the undisclosed asset. That is exactly what happened in one well-known case, where a wife concealed her $1,336,000 share of a lottery jackpot, filed for divorce without disclosing it, and routed the lottery checks through her mother's address. The trial court awarded her ex-husband every dollar of the winnings, and the Court of Appeal upheld the award in full: the evidence supported the finding of fraud, and the law's plain language left no room to soften the penalty.

It was no defense in the bitcoin case that the hidden investment turned out well. The court rejected the husband's argument that his undisclosed bitcoin purchases had enriched the community by millions, holding that "the financial success of one undisclosed investment does not erase the harm" caused by a separate undisclosed transaction. He was ordered to turn over an additional 249.445 bitcoins,$22,500 in cash, and his ex-wife's attorney's fees, with the practical effect that the coins stranded at the bankrupt exchange fell on his side of the division, not hers.

Even apart from these remedies, a spouse who withholds or delays disclosure faces monetary sanctions. If a party fails to comply with the disclosure statutes, the court must impose money sanctions in an amount sufficient to deter repetition of the conduct, plus attorney's fees, unless the offending spouse shows substantial justification or that sanctions would be unjust. In one prominent case, a husband who concealed a home purchase, a $1 million bond, a 401(k) account, and several business entities was sanctioned $250,000 plus $140,000 in attorney's fees, and the appellate court confirmed that no showing of separate injury to the other spouse is required.

Who Must Account For Missing Crypto?

What about crypto that simply vanishes? A spouse with sole control of the private keys might hope that what the other spouse cannot find, the court cannot divide. California law answers with a burden shift: once the spouse without control makes a basic showing that community assets of a certain value existed in the other spouse's control after separation, the burden of proof shifts to the controlling spouse to account for them. If that spouse cannot show what properly became of the assets, the court charges them with the missing value in the property division.

This rule exists because the spouses have vastly unequal access to the evidence when one of them manages the money, a concern that fits crypto perfectly. And in practice, digital assets leave more of a trail than people expect. Most purchases start with ordinary bank transfers to an exchange, the exchanges keep account records, and experts can work forward from there, as in the bitcoin case, where an expert testified for the wife after reviewing the e-mail trail behind the husband's proxy purchases. Tracing matters for another reason as well: where crypto was bought with a mix of separate and community money and the funds cannot be traced and identified, the community property presumption generally prevails and the commingled asset is treated as community property. Careful records, and a well-planned approach to discovery, often decide these issues.

How Is Cryptocurrency Valued?

Valuation is where cryptocurrency's volatility matters most, and California has a specific statutory framework for it. California's default rule is that the court values community assets "as near as practicable to the time of trial." For a volatile asset, that means both spouses generally share the rise or fall between separation and trial. In the bitcoin case, coins bought for roughly$45,000 had appreciated to around $8 million by the end of December 2017,within weeks of the parties' judgment, and the in-kind division meant each spouse shared in that growth.

The default is not absolute. On 30 days' notice and for good cause, the court may value all or part of the assets at a date after separation and before trial where doing so is needed to divide the estate equitably. The courts have upheld alternate valuation dates where the change in an asset's value after separation was primarily the product of one spouse's personal skill and effort, reasoning that post-separation earnings belong to the spouse who earned them. The flip side is that when an asset's value moves with the market rather than through one spouse's efforts, the trial-date default generally holds. Crypto that simply sat in a wallet will usually be valued at trial, with both spouses sharing the swing, while a portfolio one spouse actively traded after separation is where the valuation date is most likely to be contested, so the issue deserves attention early in the case, not as an afterthought.

Dividing the coins themselves, as the judgment in the bitcoin case did, avoids much of the dispute: each spouse takes half the asset and half the future volatility. A buyout at a fixed value, by contrast, locks in a number for an asset that will keep moving the day after judgment, and taxes deserve attention of their own: transferring crypto between spouses as part of a divorce is generally not a taxable event under federal law, but selling coins to fund a buyout can be, and where the division creates an immediate and specific tax liability, the court must take it into account in equalizing the division. Either approach can be right; the point is to choose it deliberately.

When Should You Talk To A Family Law Attorney?

If either spouse holds digital assets, the time for advice is early, before disclosures are served and before anything is moved. A spouse who owns crypto needs to disclose it completely, including the facts behind the numbers, and avoid transactions that could violate the automatic restraining orders. A spouse who suspects hidden crypto needs a discovery strategy while the records are fresh, and in the right case, a forensic expert.

An experienced California family law attorney can help you inventory digital assets, obtain exchange and banking records, decide whether the facts justify an alternate valuation date, and structure a division that deals sensibly with volatility, rather than leaving these questions to chance.

Final Thoughts

Cryptocurrency does not change the fundamental rules of a California divorce. It raises the stakes on three of them: everything must be disclosed, spouses who hide or lose track of assets can be charged with them, and value must be measured carefully for an asset that never stops moving. The cases make the consequences of concealment plain, from the wife who lost every dollar of a concealed lottery prize to the husband left holding the loss on bitcoins he bought in secret.

Understanding these rules, keeping good records from the date of separation forward, and getting experienced advice early can help you approach your divorce from an informed position rather than a reactive one. If you have questions about how cryptocurrency or other digital assets might affect your case, make an appointment with an experienced family law attorney at Cage & Miles, LLP today.