If you are going through or considering a divorce in Colorado, you may be wondering how Colorado courts handle cryptocurrency. To understand how cryptocurrency is divided, you must understand a few basic principles about Colorado divorces. The first principle is the understanding that Colorado is an “equitable” division state. The second principle is that Colorado divorces only divide “marital” property and not “separate” property. Once these two principles are understood, we can then discuss how cryptocurrency is divided in a Colorado divorce.
What is an “Equitable” Division State?
In a Colorado divorce, property division must be made in an equitable manner. The simplest way to describe an “equitable” division is that marital property must be divided fairly, but not necessarily equally (50/50). Therefore, it would wrong to assume that the property and debt will be divided 50/50 between the two spouses. Because Colorado courts divide a marital estate equitably or fairly, it is not uncommon for a court to divide the property unevenly.
What is the Difference Between “Marital” and “Separate” Property
In a Colorado divorce proceeding, the court can only divide “marital” property. Consequently, there is great importance placed on the distinctions between marital and separate (nonmarital) property.
Generally, all property acquired by either spouse after the date of marriage and prior to the divorce decree is considered marital property, regardless of title. The following exceptions are considered separate property:
- Property acquired by gift, bequest, devise, or descent
- Property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise, or descent
- Property excluded by valid written agreement between the parties, such as a prenuptial agreement
If property was acquired prior to the marriage but increased in value during the marriage, the property will have both a marital component and a separate (nonmarital) component. The separate component will be the value at the time the parties married one another with the marital component will be the increase in value over the life of the marriage.
For example, if one spouse had cryptocurrency that was valued at $30,000 on the day of marriage and subsequently was worth $200,000 on the date of divorce, the separate value is $30,000 and the marital value is $170,000.
How is Cryptocurrency Divided in a Colorado Divorce?
When dividing property in a Colorado divorce, the court must follow a three-step process. Step 1 is to identify what is and is not considered “property.” In Step 2, the court determines which items are marital and separate property, setting aside each party’s respective separate property. Finally, in Step 3, the court considers all relevant factors in dividing the marital property to ensure an equitable result.
- Step 1: While cryptocurrency is a digital currency with no physical asset, it is still considered “property,” much like ownership in a stock or bond. Cryptocurrency is considered an asset, not income, and must be disclosed as an asset by the spouse in whose name the currency is held.
- Step 2: Generally, to value cryptocurrency the court will look to the value of the currency on the day of marriage and on the day of divorce. The value on the day of marriage is usually considered separate property while any increase in value of the account between the day of marriage and the day of the divorce is considered marital property. Cryptocurrency valuation can be difficult because of the fluctuation in value. Traditional stocks, while changing in price, typically don’t share the volatility of cryptocurrency. There continues to be debate over the proper method of valuing cryptocurrency. Below is a list of common valuation methods and issues:
- Transfer: Transferring cryptocurrency means that one spouse will send the currency to the other spouse. This is accomplished by transferring cryptocurrency by way of electronic wallets. These types of transfers typically have associated fees that may be considered by the court.
- Cash-Out: This method is accomplished when one spouse sells some or all of the cryptocurrency. When the sale occurs, there are both fees and taxes. Assuming the cryptocurrency has increased in value, the IRS will require that the spouse who owned the currency pay a capital gains tax.
- Offset Valuation: This method involves one spouse keeping the cryptocurrency in lieu of some other marital asset. For example, one spouse keeps their cryptocurrency account that is value at $20k in lieu of receiving $20k of equity in a shared home.
- Step 3: Once the court decides what is marital property, the court will divide the marital property on an equitable basis after taking into consideration “all relevant factors.” It is important to note that Colorado is a “no-fault” state, which means that the court cannot consider marital misconduct, such as infidelity, when dividing property. “All relevant factors” include but are not limited to:
- The contribution of each spouse to the acquisition of the marital property, including the contribution of a spouse as homemaker;
- The value of the property set apart to each spouse;
- The economic circumstances of each spouse at the time the division of property is to become effective, including the desirability of awarding the family home or the right to live therein for reasonable periods to the spouse with whom any children reside the majority of the time; and
- Any increases or decreases in the value of the separate property of the spouse during the marriage or the depletion of the separate property for marital purposes.
Once all of the relevant factors are considered, the court will then decide how to divide the cryptocurrency. With the relative newness of cryptocurrency, litigants should consult with divorce attorneys who have experience with this type of asset or hire an expert to assist in the case.
If you’re going through a divorce process that involves cryptocurrency, you need to be sure that you hire an attorney with the experience necessary to handle the complexities of digital currency. The experienced and knowledgeable team at Burnham Law is here to make that happen for you. With our help, you can transition into this new chapter of life with confidence, knowing that your interests are being represented and legally protected.