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Digital Dissolutions: Cryptocurrency and the Marital Estate

Most people understand that when getting divorced in Texas you have to be able to figure out how your community property is going to be divided between you and your spouse. When we think about Community property typically, we have in mind things like bank accounts, investments, your family house, vehicles, and personal property. However, with the advent of new technology, we also have a digital and online-based property that we cannot necessarily put our fingers on yet Are extremely valuable, nonetheless. This should come as no surprise given how we cannot exactly put our hands and fingers on our mutual funds or 401K, but a new age of technology has spurred growth in unique and novel types of Investments and property.

Probably the most well-known and popular type of investment of this sort is cryptocurrency. Cryptocurrency is one of those things that is so popular that its popularity has probably grown faster than the amount of knowledge that any of us have regarding this subject. Many of us have tried to spend the last few years learning as much as we can about investments and the world around us. What many of us have done is purchase cryptocurrency with the hope that I become a competitor for traditional currencies and thus make you some money.

The media has been heading over heels in terms of the attention paid to cryptocurrencies. For some time only investing geeks and the tech-savvy crowd paid much attention to cryptocurrency. That’s all changed. As we close out 2021 and enter 2022, I think that cryptocurrency only becomes more popular. If more banks and businesses begin to accept cryptocurrency as a form of payment and a store of value, then the potential usefulness of “crypto” as an investment sky-high.

With all of this in mind, you need to be aware of the potential ramifications of a divorce in Texas may have on the cryptocurrency that you own. Not only does this subject involve matters related to Texas community property law but also issues regarding an up-and-coming investment. I think that this is one of the more interesting subjects that we have ever written about here on our blog and I’m excited to see what you all think, as well. Before we go any further, however, we should probably talk a little bit about what cryptocurrency is.

What is cryptocurrency?

Cryptocurrency is defined as a means of secured value exchange. Currency, like a dollar or a peso, is a store of value. We trust that a piece of paper with George Washington's face is worth one dollar and can therefore provide us with that much purchasing power. Without that confidence- both on our part as a purchaser and a seller of goods' part- the piece of paper wouldn't be worth much of anything to us. We throw away scraps of paper all the time. A one-dollar will is a dirty piece of paper if we don't believe that it is worth one dollar.

Where cryptocurrency differs from the traditional currency is that it does not hold value in the same manner as the dollar bill that we described above. Cryptocurrency is less about two people exchanging the currency for a good/service and more about both people receiving something tangible in the form of their exchange of value. There are multiple types of cryptocurrencies. You may have heard of all or some of them: Bitcoin, Ethereum and Ripple are three more prominent types of cryptocurrencies.

Community property laws in Texas

Texas is a community property state. You may have already known that. Community property refers to how marital property is treated upon your death, the death of your spouse, or divorce. The basic presumption regarding community property is that once any of those three events above occur, it is presumed that all the property owned by either you or your spouse is owned equally by the two of you. Not that you own half, and your spouse owns half. Rather, it is presumed that each of you owns all that property in full. Therefore, that community property must be divided. In a divorce scenario, either you and your spouse would do the dividing, or a family court judge would do it for you in a trial.

Property like your home, your bank account, investment accounts, personal property, and vehicles could also potentially be part of your community estate and thus eligible for division in a divorce. What many people do not realize is that debts are also divisible in a divorce and that these debts may not even be ones that you took out yourself. For instance, if you took out a loan to purchase cryptocurrency your spouse might take on the responsibility to pay that debt in exchange for something else of value in a divorce. We see the lessons associated with value exchanges in the divorce world, as well!

There are exceptions to the general presumption that all property owned by you and your spouse at the time of your divorce is community property. The most common exceptions that could be a part of your divorce include money or property gifted specifically to you or your spouse individually and money or property inherited by either of you. However, for the sake of brevity and clarity, we will not get into those exceptions. However, I think it is a good idea for you to be aware of them as you learn more about the divorce process in Texas.

Imagine that you and your spouse were married for twenty years. At the end of that twenty years, your spouse files for divorce from you. When you and your attorney begin to look at the totality of what encompasses your community estate you can see that the property therein is valued at $300,000 with property and debts considered. All things being equal the two of you would split that community estate right down the middle with each of you ending up with $150,000 at the end of the divorce. No consideration is paid towards the spouse who "earned" the income that was used to purchase the property. So long as the income earned was done so during the marriage then that property is a community in nature.

There are always factors that can make a difference in determining how property is divided. Fault in the breakup of the marriage, the value of your separate estates, your educational background and work history relative to your spouse, and on and on. Family violence can, unfortunately, play a role in how property is divided but hopefully, that is not relevant in your case. My point in mentioning all these factors is just that you be aware of what they are and how they can impact your case from beginning to end.

Bitcoin and cryptocurrency about community property division

Now we have at least discussed what cryptocurrency is and what community property is. Of course, both subjects are a lot more complex than what we have discussed today. You can look for more in-depth blog posts on our website regarding community property. It is a subject that we write about on a semi-regular basis. Additionally, there are surely dozens if not hundreds of articles on the internet right now that will walk you through cryptocurrency from various standpoints. Go ahead and read those if you want a broader perspective on this subject. You should certainly do this if you intend to purchase cryptocurrency as an investment.

Bitcoin and cryptocurrencies in general are an asset and are divisible in a Texas divorce. You can purchase cryptocurrencies online or you can “mine” for them. If you performed either of these two actions during your marriage, then the resulting cryptocurrency that you earn will be part of your community estate. This property would need to be divided in your divorce. The presumption is that the currency would need to be divided between you and your spouse equally just as we talked about earlier in today’s blog post.

Cryptocurrency is treated as an investment for most people who own it. There are relatively few applications where you can spend the cryptocurrency that you have purchased. Retailers, online or brick and mortar, do not frequently accept cryptocurrency now. What the cryptocurrency was purchased for years ago does not matter as much as what the value of the crypto is worth today. The cash basis for the cryptocurrency is less important than its current value. Let’s use a hypothetical situation to illustrate our point a little more clearly.

Suppose that you purchased some Bitcoin valued at $1,000 in 2015. Now that same bitcoin is worth $100,000. Note that I have no idea if this is a real increase in value. I just wanted to use round numbers for the sake of clarity in this setting. The value of your asset would be determined at the time of your divorce rather than when you first purchased the property. This is akin to valuing a mutual fund at the time you got a divorce rather than in 2012 when you purchased the mutual fund through an investment broker. You and your spouse would split the bitcoin down the middle or you would need to cede to your spouse other property that is as valuable as their hypothetical share of the bitcoin.

Protect yourself and the marital estate

One of the things that makes any investment a risky proposition is that investments are risky. Even the most conservative investments carry with them a certain amount of inherent risk. Index funds that are 50 years old and pegged to the value of the S and P 500 carry with them a certain risk level. That risk level is low compared to other types of investments. Single stocks are riskier than mutual funds. Cryptocurrency is more speculative and uncertain in its value now and in the future than either mutual funds or index funds. However, if you bury your money in a coffee can in the backyard it will not be able to keep up with inflation. However, investing all your money in cryptocurrency may not be wise, either. Since I am not an investment professional, I will not try to wade into these waters too much. However, if you are interested in learning more about these types of investments it would be wise to contact a wealth or investment planner to do so.

Dealing with the high risk and high reward nature of cryptocurrency trading and ownership is part and parcel of highly volatile investments. Like I mentioned a moment ago, owning single stocks is seen by some as being overly risky compared to owning mutual funds or index funds. It is all about tolerance. If you can tolerate owning a volatile investment and can afford to take a loss, then you may be in a good position to learn more about what cryptocurrencies can offer you as an investment.

What some people experience throughout their owning cryptocurrencies is that they cannot stomach the losses associated with this product. Cutting loose of investment can make sense even if you have only owned that investment for a short period. "Sunk costs" are a part of doing business and investing. Simply sticking with investment due to your already having suffered a loss and hoping for a rebound is known as the sunk cost fallacy. Again, an investment professional can help you understand this point better than I ever could.

We don't know where cryptocurrencies are headed as far as their value. People point to continuing inflation as a sign that cryptocurrencies may gain favor even with weekend investors. This is far from certain, however. Just know that you should have an investment professional in your corner to provide you with tips when purchasing cryptocurrency and possibly dividing that cryptocurrency in a divorce.

How cryptocurrency can aid your spouse in hiding assets

Some spouses who go through a divorce will look for every edge that they can discover. The manipulation of your community estate through owning cryptocurrency is not a given but it is a possibility depending on your circumstances and the nature of your spouse. Remember that cryptocurrency is digital. It cannot be physically held. Since it is sorted on a computer this makes it easier for someone to transfer or hide property from you that should be a part of your community estate.

If your spouse owns the cryptocurrency secretly, he or she may plan to file for divorce first and use the warning to hide their ownership in the bitcoin or other type of cryptocurrency. Would your spouse try to convert a bank account into cryptocurrency? You would have to go through a divorce to find out for certain one way or another. While there is no way for your spouse to do any of this in a 100% secretive manner it does not help that all these transactions are done 100% online and out of your view. It may take an experienced accountant or another expert to try and track down these transactions on your behalf.

Your spouse may try to pull a fast one on you as far as the cryptocurrency is concerned. Many times, spouses feel that they can hide assets even from the discovery process by lying about ownership or undercounting their investment into bitcoin. If you suspect that your spouse owns property that he or she is not divulging in the divorce this is something that you should make your attorney aware of immediately. Do not wait. The longer you wait the greater chance that any method you could have employed to trace the purchase of the bitcoin could vanish into thin air.

A CPA could be brought into your divorce to look through your financial accounts to determine if money was utilized to purchase bitcoin. This can cost you money and take up a great deal of time. However, it is better to spend money and use time wisely if it can protect you and your interests in the divorce. Many times, all you have to rely upon at the beginning of a divorce is your instinct on subjects like this. However, you should follow your nose on this, and if it leads to something smelly you should not walk away and leave it alone. You are better of pursuing something that could be relevant to your case rather than walking away because you may not know how exactly to proceed. An experienced family law attorney can help you to learn more about this process and how to protect yourself from fraud in the marriage when it comes to digital currency like bitcoin.

Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as how your family's circumstances may be impacted by the filing of a divorce or child custody case.

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Law Office of Bryan Fagan, PLLC | Houston, Texas Divorce Lawyers

The Law Office of Bryan Fagan, PLLC routinely handles matters that affect children and families. If you have questions regarding divorce, it's important to speak with one of our Houston, TX Divorce Lawyers right away to protect your rights.

Our divorce lawyers in Houston TX are skilled at listening to your goals during this trying process and developing a strategy to meet those goals. Contact the Law Office of Bryan Fagan, PLLC by calling (281) 810-9760 or submit your contact information in our online form. The Law Office of Bryan Fagan, PLLC handles Divorce cases in Houston, Texas, Cypress, Klein, Humble, KingwoodTomballThe Woodlands, the FM 1960 area, or surrounding areas, including Harris CountyMontgomery CountyLiberty County, Chambers CountyGalveston CountyBrazoria CountyFort Bend County, and Waller County.

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