Crypto is complicated but protecting it shouldn’t be. Whether you are a crypto early adopter millionaire or just dipping your toe into the pool of digital assets, a prenup can protect the current and future value of your cryptocurrency. As an asset known for skyrocketing in value, it’s extremely important to address what happens to your cryptocurrency should you divorce. Nothing like a surprise crypto fortune to turn a divorce ugly. Addressing the ownership of your crypto early on can ensure that you and your fiancé are on the same page, you’re both protected, and any future divorce is simplified. Win, win… win!
Crypto-curious
At this point, even your grandma is likely aware of Bitcoin. Since Bitcoin’s arrival in 2009, cryptocurrency has skyrocketed in popularity. The reason for its popularity is easy to understand as Bitcoin has outperformed the traditional market year after year. However, Bitcoin isn’t alone anymore. Over the years, several more cryptocurrencies have entered the market. Some popular newcomers include Ethereum and Solana. Their names may not have percolated to your grandma’s ears like Bitcoin just yet, but Ethereum and Solana have become some of the most traded coins in the market.
Just because crypto is widely popular, doesn’t mean it’s widely understood. In case you’re in the camp of – huh? – when it comes to crypto, here’s a quick rundown on the basics. Cryptocurrency is a digital currency. The real kicker is it does not rely on a centralized authority like say, the US dollar does. Instead, cryptocurrency uses a decentralized system – blockchain – to record transactions. Think of this as a virtual ledger. Crypto can be purchased, sold, traded, and used to pay for goods and services. Whenever one of these actions occurs, the blockchain ledger updates to reflect it. However, most often, owners hold onto their bitcoin and treat it as an investment. Think of it as digital gold!
Ownership of cryptocurrency is linked to a “private key”. Proving that you know the private key can verify your ownership of the crypto. However, the catch-22 is that revealing the private key can make your crypto vulnerable to theft. The most popular option for verifying your ownership is to sign a message with your private key (check out more info here!). Proving ownership can become very important in the event of divorce.
Crypto & Divorce
While crypto may have been able to fly under the radar in years past, the digital currency has definitely captured the attention of the court system. Cryptocurrency has now become the subject of many a divorce battle, sometimes even requiring the use of forensic experts to track down the crypto and determine its value. Moral of the story: if you think you can leave your crypto out of divorce proceedings, you are sorely mistaken.
While there aren’t many laws specifically tailored to cryptocurrency or other digital assets in divorce proceedings, generally, crypto is treated just as any other asset during a divorce. That means that if it is not protected by a prenuptial agreement, your spouse is likely entitled to a portion of it, depending on the state in which you live. For example, if you purchase crypto during your marriage in California – a community property state – your spouse will likely be entitled to half.
In order to carry out the court’s order regarding ownership, the couple can either choose to transfer the assets accordingly or sell them and dish out the value in USD. When it comes to crypto-newbies, selling can sometimes be the better option so the newbie isn’t forced to manage the unfamiliar digital currency. But of course, this can present tax issues.
Prenup Considerations
If dividing digital assets and considering tax implications just made your head spin, don’t worry, there is a simpler option – a prenup of course! Prenups allow you and your partner – rather than the court – to take control of the financial decision making. When you divorce without a prenup, your property, assets, and debt are divided and distributed in accordance with the laws of your state. While you may get some say-so in the process, generally, the judge is in the driver’s seat.
In addition to providing a sense of control over your financial decisions, prenups allow you to make these decisions early. This is good for multiple reasons. First, you and your fiancé will likely reach more amicable and fair decisions before the divorce occurs. Second, any future divorce will be simplified and streamlined (read: less stressful) as the bulk of the decisions have been pre-made. The only thing worse than a divorce is a protracted one. Prenups help you prevent that from happening. And remember, a prenup does not mean you are going to get divorced. It is simply a back-up plan that is there should you need it.
Before we get into all the tips and tricks for protecting your crypto, one important reminder: you must disclose all of your crypto before you finalize your prenup! This is very important. Failure to do so could have disastrous consequences down the road. A financial disclosure is generally required in every state (though there are some exceptions). If you leave your crypto, or any asset, property, or liability for that matter, out of your financial disclosure, a judge could completely invalidate your prenuptial agreement. Nobody wants that! So, we can’t stress this enough, don’t shortcut this step! (You can check out more info on financial disclosures here).
Ring-Fencing Your Crypto
Prenups are especially conducive to cryptocurrency. Let’s illustrate this with an example. Following your wedding, you decide to invest in Ethereum to celebrate the nuptials. Although your investment is relatively small, you are hoping for a future payday. Years go by and you’ve all but forgotten about that crypto purchase. However, one day you read a headline about the skyrocketing value of crypto and check in on your own stash. Come find out your small investment has now become a huge chunk of change. When you and your wife later separate, the divorce proceedings become a battle for the crypto.
As a relatively volatile asset that has the potential, and a documented history of, exponential growth, crypto is certainly something that should be addressed in a prenuptial agreement. In the above example, had the small investment not ballooned in size, there would be nothing to fight over. However, because the future value is so uncertain, you may be sorry if you don’t make ownership determinations early on.
If your partner has no interest in or knowledge of cryptocurrency, it can also add insult to injury when they are awarded a sizeable chunk of your investment. On the flip side, as someone who has no experience with crypto, you may not want to take on the burden on managing the volatile asset. Again, a prenup can make clear ownership determinations to prevent confusion down the line.
Reducing Expenses
Lastly, as we touched on above, dealing with cryptocurrency in divorce proceedings can be complicated. In litigation terms, complicated equals expensive. First, if you and your spouse can’t agree on the division of an asset during divorce, the proceedings are going to take much longer, and you are going to fork out a lot of extra cash to pay your attorney and potentially even your spouse’s attorney. Ouch. Double that if you have to involve forensic experts to locate or value your digital assets. If you don’t want to spend that precious crypto on litigation fees, get your prenup locked down before you marry.
Post- Marriage Crypto
If you are reading this thinking “that sounds all fine and dandy but what if I don’t have any crypto yet?”, don’t worry, you have options. You and your fiancé can decide in your prenup that you are not going to have any marital/community property. In that case, even if you don’t have separately owned cryptocurrency before marriage, your prenup will protect your crypto purchases post-wedding. Additionally, you can also get a postnuptial agreement or a transmutation agreement after marriage.
Jointly owned crypto
So, what if you don’t want to keep your crypto separate? A prenup can still help! You and your fiancé can use your prenup (or postnup!) to determine who gets what and how the split will occur. The options are endless. Maybe you want to split it right down the middle or maybe you want to keep the crypto and your spouse wants another asset. The decision is totally up to you! However, by making these decisions now, you have much more control and can tailor the arrangements exactly to your liking.
Final thoughts
Ok if owning a private island is on your bucket list, crypto can certainly help you get there. Here comes the but… you must protect your crypto now! Leaving your digital assets out of your prenup could spell disaster down the road. Don’t let a judge make decisions about the crypto you’ve been patiently nurturing for years. Your prenup can ring-fence your early investments to ensure that the upside ends up in your own pocket or, can create amicable divisions of jointly owned crypto. The options are endless. Get started on your prenup today!
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: [email protected]
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