How Do Bitcoin and other Cryptocurrencies get treated in a Divorce Case?

Cryptocurrencies involve many types of digital assets. Bitcoin, Ethereum, and Solana are only a few of over 20,000 cryptocurrencies currently traded on cryptocurrency exchanges around the world.

This article will not attempt to explain the vast technical details of how any particular cryptocurrency functions, or how to acquire a cryptocurrency, or why people even find value in cryptocurrencies. There are several other sources dedicated to educating the reader on such topics.

For our purpose in this article, it is sufficient for the reader to know that:

1. Bitcoin is a type of digital currency that is maintained on a decentralized ledger called the Bitcoin “blockchain.” The Bitcoin blockchain is a system in which a record-of-transactions is maintained using digital cryptographic inscriptions across several computers that are linked in a peer-to-peer network. This network also secures the records-of-transactions and requires a substantial amount of computing power to continually process and verify the transactions that continuously take place on the Bitcoin blockchain and prevent the record-of-transactions from becoming hacked or manipulated.[1]

2. There is significant value in many cryptocurrencies. A single unit of Bitcoin (BTC), for example has continuously traded at over $10,000 per unit for almost four years now.[2] At the start of 2024, that same unit of Bitcoin traded at a value of $42,000. At the time of posting this article, that same unit of Bitcoin can be traded at over $64,000.

3. A significant shock to the global supply of Bitcoin is occurring soon. Today is anticipated to be Bitcoin’s fourth “halving event,” which basically means that the rate at which all new Bitcoin is created (or “mined”) will be cut in half, thus making less new Bitcoin available in the global supply.[3]

4. A great potential for demand occurred in 2024. For the first time in Bitcoin’s 15 year history, the United States Securities and Exchange Commission (SEC) approved several Bitcoin Spot Exchange Trade Funds (ETFs) thus allowing some of the largest U.S. based investors to have a safe and regulated highway to purchasing vast amounts of Bitcoin for their investment portfolios.[4] In addition to the US based Bitcoin Spot ETFs, Hong Kong market regulators have conditionally approved their own Bitcoin Spot ETFs for Asian based investors, adding more potential for a sharp increase in the demand of Bitcoin.[5]

So how will a Texas divorce court treat cryptocurrency owned by you or your spouse?

First, one should be aware that if a divorce is imminent, a cunning husband or wife may begin planning for the divorce which, unfortunately, could include attempting to hide marital assets in a place where their spouse and their spouse’s attorney are least likely to look. There are a wide variety of methods to conceal marital assets that folks going through a divorce attempt to hide for the purpose of concealing their assets from a divorce, including converting a significant amount of cash into Bitcoin or another form of cryptocurrency. Even more, they could then convert those funds into any of over 20,000 cryptocurrencies currently being traded, and/or transfer them through a variety of digital wallets on centralized exchanged and/or decentralized exchanges. Some questionable cryptocurrencies tout the promise of being private for the purpose of evading attempts to trace the traders of the cryptocurrency. Additionally, some cryptocurrencies reward their users with significant interest-yields (called “staking rewards” or “liquidity pool rewards”) for simply buying their cryptocurrency and storing it for a certain period on a particular digital wallet. There is potential for substantial wealth to be generated through these methods. These are few of many reasons why it is critical to find a Texas divorce law firm that understands how to identify if your spouse has purchased any cryptocurrencies, how to obtain records relating to it, how to track the digital trail left by your spouse’s transfers, and what kind of staking rewards or liquidity pool rewards your spouse may have yielded through their investment of your community property funds in cryptocurrencies.

Once it has been established to the Court that the parties own a certain number of cryptocurrencies, the Court will presume that the cryptocurrency, like all other property and assets belonging to you and your spouse, are characterized as “community property.” This is a legal presumption in Texas marital property law. All community property is subject to a just-and-right division at the conclusion of a divorce case, which most commonly means a 50-50 division of the community estate of the divorcing-spouses.

However, a spouse may try and meet their legal burden in establishing that some of the property, including any cryptocurrency, is their separate property because they either:

(1) acquired an interest in that property before the start of the marriage, or

(2) they acquired it during the marriage by a gift made to only them, or

(3) they inherited the property from a deceased relative, or

(4) they traded or converted other property that falls into the prior three category into new property that they are now hold at the time of the divorce.