In Alabama, cryptocurrency is treated as a marital asset subject to equitable distribution, not a separate class of property. While this seems straightforward, the decentralized and volatile nature of digital currencies introduces unique complexities in divorce cases.
1. Marital Asset Subject to Equitable Distribution
Alabama is an equitable distribution state, not a community property state. This means that while crypto acquired during the marriage is considered marital property, a 50/50 split is not guaranteed. Courts aim for a fair division based on each spouse’s financial contributions, needs, and circumstances. Crypto purchased before the marriage is considered separate property, but any appreciation in value that occurs during the marriage may be included in the marital estate.
2. Identifying and Uncovering Hidden Crypto Assets is Crucial
The pseudonymous nature of crypto makes it an ideal tool for concealing assets. Spouses may attempt to hide holdings using anonymous digital wallets, privacy-enhancing services, or offshore exchanges. Fortunately, courts have effective tools at their disposal. Legal discovery, subpoenas to crypto exchanges, and forensic blockchain tracing can be used to uncover and track these concealed assets.
3. Valuation of Volatile Crypto Assets
Cryptocurrency’s significant price volatility presents a major challenge for valuation. To ensure a fair division, parties must agree on a consistent valuation method. Common approaches include using a snapshot date (e.g., the date of separation or filing) or an average value over a specific period. Without a clear valuation method, the process can become prolonged and costly, especially as asset values fluctuate.
4. Methods for Dividing Cryptocurrency
Once valued, crypto assets can be divided in several ways, each with its own advantages and disadvantages:
- In-kind division:Â The crypto is physically split and transferred into separate digital wallets for each spouse, allowing both to retain direct ownership.
- Liquidation:Â The cryptocurrency is sold, and the resulting cash is divided. While this is the simplest method, it eliminates the possibility of future gains.
- Offsetting:Â One spouse keeps the crypto while the other receives an equivalent value in another marital asset, such as real estate or retirement funds.
- Buyout:Â One spouse pays the other a predetermined cash amount to keep the entire crypto holding.
5. Court Protections Against Asset Concealment
Courts can issue temporary restraining orders to prevent a spouse from moving or liquidating crypto assets during divorce proceedings. However, a significant challenge arises with cold wallets (hardware devices that store crypto offline). Enforcing court orders for physical access to these devices can be difficult, making the strategy at this point even more important.
6. Accounting for Tax Implications
The IRS classifies cryptocurrency as property, meaning that transfers or sales can trigger capital gains taxes. Failing to account for these tax liabilities during the division process can lead to significant financial surprises for the recipient. Knowledgeable attorneys will factor in post-tax values or create a plan to offset the expected tax burden in the final settlement.
Final Word: Be Diligent and Proactive
To protect your financial interests, you must be proactive. Thoroughly document all crypto holdings, including purchase dates, values, and the exchanges or wallets used. Demand full financial disclosure from your spouse and insist on a transparent valuation method. When necessary, consult with financial experts to ensure an equitable and informed settlement. This process is not about emotion; it’s about securing your financial future.
