In divorce in 2018, there is a new asset in town, and it's one that comes with considerable controversy and confusion.

It's cryptocurrency, a digital and decentralized form of online currency that has been around since only 2009. Less than a decade later, the most popular form of cryptocurrency—Bitcoin—is becoming a household name. An estimated 5 percent of Americans currently own some amount of cryptocurrency. As this number grows, so too does the number of divorces in which cryptocurrency is named as a prime asset.

Volatile in value and potentially difficult to trace, Bitcoin and other cryptocurrencies present a new wave of challenges in divorce asset division as attorneys grapple with key questions such as: How do you properly value an asset that can gyrate 20 percent or more in value in a single day? How can you be certain that your client's obfuscating spouse isn't secretly squirreling away millions in unregulated crypto coins? And when it comes to the nuts and bolts of divorce distribution, what strategies best position cryptocurrencies as a bargaining chip in asset negations?

Let's take a look at some answers.

Cryptocurrency 101

At its most basic, cryptocurrency is a way to remove the bank or credit card middle man when purchasing goods and services online. It's a peer-to-peer system for creating “digital cash.”

Once obtained, Bitcoin (or other cryptocurrency) is stored in an encrypted digital wallet with special public and private “keys”—long strains of numbers and letters—that identify the wallet and serve as its address.

When a Bitcoin is paid out or received by the user's wallet, the transaction is recorded in a “block” of encrypted data. The block becomes part of a larger “blockchain” of all transactions made by all users of the currency. The blockchain operates as an “open ledger system” available for everyone to see, thus providing built-in security and trust. Transactions are listed by public key hashes, not by the wallet owner's name.

Cryptocurrency users can put their own computers to work to actively monitor and verify the blockchain, a task for which they can earn some extra Bitcoin. It's also possible for users to “mine” for more Bitcoin by having their computers solve complex mathematical equations to create new currency.

For investors, Bitcoin and other cryptocurrencies are traded on cryptocurrency exchanges. Everyday users purchase cryptocurrencies typically through the same website or app they used to create their wallet. There are also special Bitcoin ATMs available in some cities. A growing number of online retailers and services accept Bitcoin.

Cryptocurrency as a Marital Asset

The decentralized and unregulated nature of cryptocurrency can lend itself to a “Wild West” feel when trying to classify the currency. When asked during the discovery phase of divorce to disclose all bank accounts, for example, does a Bitcoin wallet qualify as one? According to the Wall Street Journal, “Bitcoin, despite its name, isn't money … [because it] does not have governmental backing,” which can make this issue murky.

For guidance on considering which box cryptocurrency fits in, one authority to rely upon is the Internal Revenue Service. In recent years, the IRS has formed stricter standards for reporting digital currency. According to IRS Notice 2014-2, virtual currency is to be treated as property for federal tax purposes. Depending on the taxpayer's circumstances, cryptocurrency holdings can be classified as business property, investment property, or personal property.

When filing taxes, an exchange of cryptocurrency (buying or receiving) is treated as a property transaction and is subject to applicable taxation. Notably, cryptocurrencies are not treated by the IRS as a foreign currency (Section 988). Further, taxpayers who acquire cryptocurrency through “mining” must include the fair market dollar value of the currency as taxable income on their returns.

So cryptocurrency, despite only existing in cyberspace, is a real thing that has real world value, and in divorce, that makes it a real asset. As with any other asset accumulated over the course of a marriage, cryptocurrency is subject to New Jersey's equitable distribution law.

Discovery for the Digital Age

The discovery process in divorce is crucially important for bringing cryptocurrency holdings to the surface. Discovery generally begins with the New Jersey Family Part Case Information Statement (CIS), which requires each party to report comprehensive financial information, including a list of all assets in Part E. Assets that do not fit into neatly defined categories should be listed in No. 11 as “Other.” Divorcing spouses have a fiduciary duty to one another and each must sign a CIS under penalty of perjury. If there is reason to believe a CIS is incomplete, following up with formal discovery such as interrogatories and depositions can often ferret out missing information.

Cryptocurrency may be more likely to be present in high net worth/high asset cases where one or both spouses is highly invested. However, given the low threshold for entering the world of Bitcoin—wallets are often free to set up, and initial deposit amounts can be as low as the equivalent of a few U.S. dollars—adding cryptocurrency activity to discovery may be practical as a new standard.

The document you receive from the crypto-owning spouse is likely to be a simple printout of their wallet(s) activity, which can feel scant compared to an activity report prepared by a third party financial institution. However, here is where the blockchain “open ledger” system becomes useful. With some basic software, anyone can take the public key information listed with the wallet to verify each and every transaction.

Hiding Bitcoins: A Bad Idea

Much has been made about cryptocurrency as the “new Cayman Islands” for spouses who may be plotting to hide assets. This claim may be more speculative than factual. Cryptocurrency does indeed have anonymity baked into the system. Transactions are recorded in key hashes, not names, and when setting up the digital wallet, some platforms require only minimal identification (i.e., email address only).

For a spouse looking to hide money, cryptocurrency could look seductive. But, not so fast. While activity within the blockchain system may be devoid of real names or third-party oversight, when there is a question of hidden assets in divorce, forensic accountants are increasingly savvy at picking up the digital trail.

Sometimes the detective work is easy—transactions made to a known cryptocurrency trading exchange may turn up on credit card or bank statements. Sometimes, it's a little more involved. Was a large purchase made on Amazon shipped to an unknown person? This may have been an initial exchange for a Bitcoin.

Are there other unexplained withdrawals? Does iPhone app store activity show that a spouse downloaded a crypto trading and/or wallet app? Is there activity associated with this app?

According to Ilan Hirschfeld, Partner-in-Charge of New Jersey Advisory Services at Marcum LLP, “Once a Bitcoin wallet address has been identified, all transactions associated with that address are permanently stored and publicly available on the blockchain. A digital forensics analysis of computers and cell phones used by an individual can identify wallet addresses and uncover evidence of hidden assets.”

Accurate tracking of cryptocurrency can indeed be challenging, especially if the currency has been moved offline. If the hidden assets are eventually unearthed, however, a court can award attorney and expert fees to the victim. Courts understand the need for intensive work to discover hidden assets. In appropriate cases, they have awarded fees in the hundreds of thousands of dollars. Von Pein v. Von Pein, 632 A.2d 830 (NJ App. Div. 1993).

A judge who finds that one spouse has not been forthcoming can take this into account when determining an equitable division of assets and may award the innocent spouse a greater share.

Sometimes it is only after a final judgment of divorce that a fraudster is revealed. In New Jersey, perjury, whether or not it is accompanied by other acts of concealment, is a fraud upon the court, and can therefore be the basis for setting aside a judgment, order or proceeding under Rule 4:50. A court's power to reopen an equitable distribution judgment on this basis is not limited by time. New Jersey Court Rule 4:50-3; Von Pein v. Von Pein.

Valuing Volatility

Current market pricing is easily obtainable for cryptocurrencies traded on exchanges such as Coinbase, though it should be noted that the buy price will generally include fees and will therefore be higher than the sell price.

Once cryptocurrency has been identified as a marital asset, the issue most likely to arise is the appropriate date of valuation. In New Jersey, asset values are most commonly set on the date a divorce complaint is filed. However, there is evolving recognition that another date, such as the date of distribution, may be more appropriate. This is particularly true in the case of a passive asset (such as a cryptocurrency) whose value fluctuates exclusively—and sometimes wildly—due to market conditions. Scavone v. Scavone, 578 A.2d 1230 (N.J. App. Div.1988).

New Jersey division of property in divorce is called “equitable” distribution because fairness—seeking just and equitable results—is a chief concern. Painter v. Painter, 320 A.2d 484 (1974); 65 N.J. 196 (1974). Each party can therefore argue for what they believe is fair given the unique circumstances of their particular case.

Asset Division: Smart Money, Smart Decisions

When making decisions in marital asset distribution, the most obvious option may be to sell the cryptocurrency on an exchange, taking the dollar value that results, and dividing it per equitable distribution. As noted, market volatility may make it difficult to determine the optimal timing of the sale. Another drawback is the tax ramifications of paying capital gains tax on the amount the sale generates.

Another strategy that parties may want to explore is simply setting up a unique digital wallet for the other spouse and sending their share of the Bitcoin to the wallet. Given the growing number of establishments that accept Bitcoin for goods and services, the receiving party may find using Bitcoin to be a convenience.

If cryptocurrency is offered as a buyout for home equity or as leverage for negotiating other property, volatility may again be the ultimate factor to look at in these situations. Would you ever allow a client to accept a commodities trading position for their share of the family home? As always, it comes down to risk versus reward.

The Future of Divorce Is Digital

Cryptocurrency reached a major milestone in 2018 when its market cap hit $300 billion. If it still feels novel for cryptocurrency to show up on the CIS, it's now clear: Bitcoin isn't going anywhere.

For attorneys, it's imperative to embrace the digital future of asset division and the new thinking it requires.

Bari Z. Weinberger is the owner and managing partner of Weinberger Divorce & Family Law Group in Parsippany.