Cryptocurrency Holdings in a West Virginia Divorce: Tracing, Valuing, and Dividing Digital Assets

The landscape of modern finance is evolving, and with it, the complexities of divorce. For many years, assets like real estate, investment portfolios, and retirement accounts formed the backbone of marital estates. Today, however, a new and often elusive category of wealth has emerged: cryptocurrency. When a marriage dissolves in West Virginia, untangling a couple’s financial life now frequently means addressing digital assets that can be volatile, difficult to trace, and challenging to value.A divorce involving cryptocurrency requires a thoughtful and knowledgeable approach. Unlike a traditional brokerage account with clear statements and a single custodian, digital assets often exist on decentralized ledgers or in private wallets, making them harder to find and assess. A family law attorney must not only understand West Virginia’s laws on equitable distribution but also be well-versed in the technology and financial nuances of blockchain and digital currencies to properly represent a client’s interests.

How Does West Virginia Law Apply to Cryptocurrency?

In West Virginia, the principle of equitable distribution governs how a couple’s property is divided in a divorce. This is a system that aims for a fair, but not necessarily equal, division of marital assets. The first step in any property settlement is to categorize all assets as either marital property or separate property.

Marital Property: This includes virtually all assets acquired or significantly appreciated in value during the marriage, regardless of which spouse’s name is on the title. A cryptocurrency purchased by either spouse after the wedding day is almost certainly marital property.
Separate Property: This category covers assets owned by one spouse before the marriage. However, the distinction can become blurred. If a spouse owned a significant amount of Bitcoin before the marriage and that value grew due to market fluctuations, that growth may be considered separate property. But if the appreciation was a result of active management, trading, or the use of marital funds to buy more crypto, the increase in value could be considered a marital asset.

The commingling of personal and digital finances is a common complication. Using marital funds to buy crypto or paying for business expenses with crypto gains can convert what might have been considered separate property into a marital asset.

The Hunt for Hidden Digital Assets

One of the most significant hurdles in a crypto-involved divorce is simply finding the assets. A spouse with sole control over a crypto wallet may attempt to conceal these holdings to prevent them from being divided. Unlike traditional bank accounts, which can be easily subpoenaed, cryptocurrency holdings on a private wallet are not tied to a centralized institution.

Experienced family law attorneys work with forensic accountants and other financial professionals to follow the digital breadcrumbs. They can often uncover hidden crypto by:

Analyzing Bank and Credit Card Statements: Looking for large transfers to cryptocurrency exchanges like Coinbase, Binance, or Kraken. Even if the crypto is later moved to a private wallet, the initial purchase often leaves a trace in a traditional bank account.
Reviewing Tax Returns: The IRS requires taxpayers to report capital gains and losses from cryptocurrency trades. A careful review of past tax returns and associated schedules can reveal a history of digital asset transactions that may have been intentionally omitted from financial disclosures.
Examining Digital Devices: In some cases, with a court order, a forensic expert can examine computers, phones, or hard drives for evidence of crypto wallets, transaction history, or “seed phrases” (the recovery phrase used to access a crypto wallet).
Interviewing and Discovery: Asking direct, specific questions during the discovery process about digital assets, online investment accounts, and trading habits. It’s often helpful to provide screenshots of crypto exchange interfaces to jog a spouse’s memory or to provide tangible evidence of their dealings.

How Do You Value Something So Volatile?

Once a cryptocurrency is located, the next challenge is valuation. The value of digital assets like Bitcoin or Ethereum can change dramatically in a matter of hours, let alone the time it takes for a divorce to be finalized.

The date of valuation is a key issue. In West Virginia, marital property is generally valued as close to the date of the final divorce decree as possible. However, the court has the discretion to choose another date if it would lead to a more equitable result. A major market crash or a sudden surge in value could significantly impact the final settlement.

Common valuation methods and considerations include:

Average Value: Using an average value over a specific period, such as the last three months, to smooth out extreme highs and lows.
Date of Filing: Valuing the crypto on the date the divorce petition was filed, which prevents a spouse from intentionally manipulating the value or hiding assets during the proceedings.
Appreciation: The court can choose to value the asset at a specific time, like the date of separation, to avoid rewarding or penalizing a spouse for market changes that occurred post-separation.
Transaction-Based Valuation: For non-liquid assets, like tokens from a new startup that are not traded on major exchanges, a forensic accountant may need to analyze the value based on the most recent private sales or the company’s financial records.

Given the technical nature of these assets, it’s highly important to engage a certified professional, such as a forensic accountant or business valuator, who has experience in the crypto space. They can provide an objective, defensible valuation that a court will respect.

Dividing Cryptocurrency in an Equitable Settlement

After the digital assets have been located and valued, the couple must decide how to divide them. The options for division are similar to those for traditional assets, but with unique technical considerations.

Spousal Buyout: One spouse can “buy out” the other’s interest in the cryptocurrency. For example, if the crypto is valued at $100,000, the owning spouse could give the other spouse an additional $50,000 in cash, an increased share of retirement accounts, or more equity in the family home.
In-Kind Division: The digital assets can be split directly between the two spouses. This is the most direct method, but it requires both parties to have their own crypto wallets and a good grasp of the technology. A court order can direct a spouse to transfer a specific amount of crypto to the other spouse’s wallet.
Sale and Division of Proceeds: The couple can agree to sell the cryptocurrency on a major exchange and divide the cash proceeds. This provides a clean break, but it could trigger significant tax liabilities and may not be desirable if the assets are illiquid or the couple believes the value will continue to increase.
Asset Offset: The value of the crypto can be offset by awarding other marital assets of equal value to the non-owning spouse. For instance, the spouse who holds the crypto might receive a smaller portion of the marital home or retirement accounts.

The final settlement agreement should specify not only the value of the assets but also the method of transfer and the timeline for completion. This prevents a spouse from delaying the process or failing to comply with the terms of the agreement.

Tax Implications and Other Considerations

The tax consequences of dividing digital assets are a key component of any negotiation. In West Virginia and under federal law, cryptocurrency is treated as property for tax purposes. This means that selling, trading, or transferring crypto can trigger a capital gains tax.

Capital Gains: When crypto is sold, the gain (or loss) is based on the difference between the purchase price and the sale price. The tax rate depends on whether the asset was held for a short or long period.
Transfer Issues: A direct transfer of crypto between spouses as part of a divorce is generally a non-taxable event under federal law. However, if the spouse who receives the crypto later sells it, they will inherit the original cost basis of the asset. This means they could be liable for capital gains taxes on the entire increase in value from the initial purchase date.
Ongoing Financial Planning: The volatility of cryptocurrency means that the value of an award can change significantly after the divorce is finalized. It’s important to have a plan for managing and potentially liquidating the assets to protect their value.

Given these financial and legal complexities, it is vital to work with an experienced legal team that is not only knowledgeable about West Virginia divorce law but also has a working familiarity with the world of digital finance.

Protecting Your Future with Knowledgeable Legal Counsel

Navigating a divorce that involves digital assets like cryptocurrency presents unique challenges that traditional family law cases do not. The difficulty in tracing hidden holdings, the volatility of their value, and the complex tax implications all demand a legal team with a forward-thinking approach.

At the Pence Law Firm, we are committed to helping our clients navigate the evolving landscape of divorce. We provide assertive representation and detailed guidance, collaborating with forensic accountants and other financial professionals to build a clear picture of your marital estate, including any digital assets. Our aim is to lay a strong foundation for your financial future.

We invite you to contact us online or call our office at 304-345-7250 to schedule a confidential consultation.