Cryptocurrency and Digital Assets in New York Divorces

The rise of cryptocurrency and digital assets has introduced new complexities to divorce proceedings in New York. As Bitcoin, Ethereum, NFTs, and other digital holdings become increasingly common, family law attorneys must navigate uncharted territory when it comes to disclosure, valuation, and equitable distribution of these assets. In this post a Syracuse divorce attorney explains what you need to know.

Understanding Digital Assets in Divorce

Digital assets encompass more than just cryptocurrency. They include NFTs (non-fungible tokens), digital wallets, cryptocurrency mining operations, blockchain-based investments, and even valuable online gaming assets or social media accounts with monetary value. Under New York's equitable distribution framework, these assets acquired during marriage are subject to division, regardless of which spouse holds the account.

The decentralized and sometimes anonymous nature of cryptocurrency presents unique challenges that traditional bank accounts and investment portfolios do not. Unlike conventional financial assets with clear paper trails, crypto holdings can be transferred, hidden, or accessed through complex digital systems that require specialized knowledge to trace.

Disclosure Requirements

New York law requires full financial disclosure from both parties during divorce proceedings. This obligation extends to all digital assets, including cryptocurrency holdings. Spouses must disclose the existence of digital wallets, exchange accounts, private keys, and any other means of accessing cryptocurrency or digital assets.

Failure to disclose these assets can result in serious consequences. Courts have the authority to impose sanctions, award a greater share of marital property to the non-offending spouse, or even hold someone in contempt. Given the relative ease with which cryptocurrency can be moved or concealed, transparency is essential from the outset of divorce proceedings.

The Challenge of Hidden Cryptocurrency

One of the most significant concerns in divorce cases involving digital assets is the potential for concealment. The pseudonymous nature of many blockchain transactions can make it tempting for a spouse to hide assets in cryptocurrency. However, several tools and strategies can help uncover hidden digital holdings.

Forensic accountants with cryptocurrency expertise can analyze blockchain transactions, trace wallet addresses, and identify patterns of asset movement. They can review exchange account histories, examine tax returns for reported cryptocurrency gains, and look for unexplained transfers of funds that may indicate crypto purchases. Digital forensics may also reveal wallet software on computers or mobile devices, even if the spouse claims no crypto ownership.

Valuation Complexities

Cryptocurrency is notoriously volatile, with values that can swing dramatically within hours or days. This volatility creates significant challenges when determining the value of digital assets for divorce purposes. Should the court use the value on the date of filing, the date of separation, or the date of trial? What happens if Bitcoin surges or crashes during lengthy divorce proceedings?

New York courts typically value marital assets as of the date of commencement of the divorce action, though they have discretion to use different valuation dates when fairness requires it. For highly volatile crypto assets, courts may consider averaging values over a period of time or requiring immediate liquidation and division to avoid further disputes.

The valuation challenge extends beyond price volatility. Some digital assets, like NFTs or obscure altcoins, may have limited liquidity or unclear market values. Expert testimony may be necessary to establish fair market value, particularly for unique or illiquid digital assets.

Tax Implications

The division of cryptocurrency in divorce carries significant tax consequences that both parties should understand. Cryptocurrency is treated as property by the IRS, meaning that transfers between spouses incident to divorce can generally be made tax-free under IRC Section 1041. However, any subsequent sale or exchange of cryptocurrency by either party may trigger capital gains tax.

The spouse who receives cryptocurrency as part of a divorce settlement assumes the original cost basis, which means they inherit any built-in capital gains. This factor should be considered during settlement negotiations. A $100,000 cryptocurrency holding that was purchased for $10,000 may seem equivalent to $100,000 in cash, but the crypto holder will face substantial tax liability upon sale.

The Evolving Legal Landscape

As cryptocurrency becomes more mainstream, New York courts are gradually developing precedents for handling these assets in divorce cases. However, the law remains relatively unsettled in many areas, and courts have significant discretion in addressing novel issues.

Contact a Syracuse Divorce Attorney Today

Cryptocurrency and digital assets represent a new frontier in New York divorce law. While they present unique challenges in terms of disclosure, valuation, and division, they are ultimately subject to the same equitable distribution principles as traditional marital assets. With careful planning, appropriate expertise, and thorough investigation, attorneys can effectively protect their clients' interests in the digital age. If you're facing a divorce involving cryptocurrency or other digital assets, consulting with an experienced family law attorney who understands these complex issues is essential to ensuring a fair outcome. Contact our office today for a free confidential consultation with an experienced Syracuse divorce attorney.

For more details on the divorce process please visit our Divorce and Frequently Asked Questions pages

Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. Laws and guidelines can change, so always verify with current statutes or a professional.