Crypto currency is the latest darling for making (or losing) some quick money, as well hiding it in a blockchain world hidden from the IRS. While the government looks at ways of tracking crypto fortunes, Modern Law's Billie Tarascio talks with Arizona Family Law Attorney and crypto asset specialist Julie LeBenz who breaks down how to figure out how to split crypto dollars in a community property divorce.
For anyone who has invested in Bitcoin, Ethereum, Doge Coin, Cardano and more, this episode goes into the ins and outs of finding and splitting up electronic assets, and their tax consequences. Hint: it's best to get it figured out before it gets put before a judge who may not understand the crypto world as well as you will after listening to this episode.
Crypto currency is the latest darling for making (or losing) some quick money, as well hiding it in a blockchain world hidden from the IRS. While the government looks at ways of tracking crypto fortunes, Modern Law's Billie Tarascio talks with Arizona Family Law Attorney and crypto asset specialist Julie LeBenz who breaks down how to figure out how to split crypto dollars in a community property divorce.
For anyone who has invested in Bitcoin, Ethereum, Doge Coin, Cardano and more, this episode goes into the ins and outs of finding and splitting up electronic assets, and their tax consequences. Hint: it's best to get it figured out before it gets put before a judge who may not understand the crypto world as well as you will after listening to this episode.
Billie Tarascio: [00:00:00] Hello, this is Billie Tarascio with the Modern Divorce podcast. And welcome back to the show excited today to introduce to you another local family law attorney, although local is relative, she is in Sedona. And today we're going to be talking about cryptocurrency and divorce. She's got a special understanding of that area.
She's got a background in teaching and really a fascinating background. So I cannot wait for you to get to know her. Julie laBenz welcome to the show.
Julie LeBenz: Hi, [00:01:00] Billie. Thank you so much for having me today. I'm really excited to talk to your audience and to you as well and share some information about cryptocurrency.
I know it's something that not a lot of people are familiar with, and I think it's going to be an issue that comes up more and more in divorce cases.
Billie Tarascio: Yes. Yes. And yes. And yes, I can tell you right now, Modern Law has quite a few or at least a handful of cases with crypto, um, at issue and the, and the lawyers are kind of scrambling to make sure that they fully understand.
And I know like I invested in Bitcoin for awhile and then got out because I realized I didn't really understand enough. So part of this. Part of understanding how to divide Bitcoin and divorce is just not even a Bitcoin cryptocurrency and NFTs is understanding them. So can you give people a broad definition and education on cryptocurrency and. [00:02:00] And we don't even have to talk about NFTs if you prefer not to.
Julie LeBenz: Yeah. In fact, I like to really simplify it because you can get into blockchain and all the technicalities, but when it comes to divorce, what you really need to know is that cryptocurrency is an asset that is going to be subject to division.
If it was purchased during the marriage, um, with community funds and then. Um, it could be a very valuable asset because cryptocurrency has really skyrocketed in value in the last couple of years. Um, Really one of the big challenges is that it is so volatile. I mean, just in the past year, Bitcoin has gone from a low of around 29,000 to a high of around 68,000.
And there's been so many up and downs in between those numbers. So that is really one of them. One of the biggest challenges in divorce is that there's this really volatile nature of it. And [00:03:00] if you're looking to potentially cash it out in the divorce, there can be a lot of arguments about, well, what's the date?
What value are we going to use? And I think there's going to be a lot of negotiations and litigation around that. When it comes to divorce and cryptocurrency, it's about getting the proper information. And so what you're looking to do in the divorce context is start to compile a list. What are the types of cryptocurrencies?
Bitcoin or Ethereum or doge coin. There's thousands of them. So first of all, identifying what are the cryptocurrencies that are owned by the community? How many of each crypto do they have? So sometimes they're called coins. Sometimes they're called tokens, but how many Bitcoin for example, is subject to division?
And then finally is that issue of the value. And, you know, crypto is, is similar to stocks in how it fluctuates. But with [00:04:00] stocks you can get a printout showing, okay, this is all the crypto, or this is, these are all the stocks you own. Here's the value, you know, and you get like quarterly statements. That doesn't happen with cryptocurrency and there can be so many transactions depending on how sophisticated the investor is that you aren't necessarily going to be able to go to just one place to get the type amount and value information.
Billie Tarascio: Well,
okay, so you just said a lot there, but one of, one of the immediate questions is. How, if you are the spouse who does not have the information, you just know that your spouse owns crypto, you don't know where you don't know how much, um, how do you get that information? If they're readily giving it to you?
Julie LeBenz: Um, you know, I recently recorded a video about this, that I put on my YouTube page.
So there's a lot more information and, and, and this video is really, um, for an audience of lawyers. It gives you no language to [00:05:00] use in discovery requests and stuff like that. So it's a technical video, but it's really going to be through the disclosure and discovery process that you are going to be able to get this information, or at least try to.
It depends on the complexity of the case and the type of investor that you're dealing with. But one of the key documents to get are what are called transaction logs and Coinbase, for example, that's the most well-known cryptocurrency exchange. Um, it maintains transaction logs for tax reporting purposes, and those will show historical list of all transactions from the time that the account was opened. Now that's going to be helpful, but it's not necessary. You know, it's not a list of what you currently own. It's going to show all these different transactions. And it reminds me of when I go into like the recorded records for real estate, and sometimes people have taken out a ton of loans, you know, and like refinanced a million times and you have to like, create a timeline to go, okay, [00:06:00] is this loan still in place or did they satisfy this?
You know, you don't just go on the records and it tells you, oh, this is the loan that's subject to that piece of real estate. You have to create a, a history of what's happened and figure out what's going on today. And the cryptocurrency transaction logs are going to be like that too. You may see it's purchased here.
It's sold later, transferred to a private wallet, transferred to another exchange. There could be a lot of different transactions and that's when you know, if you are the spouse that doesn't have this information, number one, you're want to team up with a lawyer. Who's going to be able to dive in and make the discovery requests to try to get this information.
Um, because you're really at the mercy of the other spouse there, isn't going to be some third party institution to get all of the data for. Um, so it is tough. And I think as lawyers too, that's going to be a criteria to consider when [00:07:00] you're looking at what type of cryptocurrency cases you want to take on, are you talking to the investor spouse or are you talking to the non investor spouse? In my experience, spouses don't really do crypto together. They may both be into it, but the way it's set up, they would each have their own separate accounts would be in charge of their own transactions would have their own separate wallets. So yeah, they may talk about it.
They may be into it together, but they won't always know everything that the other side is doing. And in my experience, that situation is pretty rare when both are into it. Usually it's just one spouse that's into, it knows everything. And the other is like, oh, this is complicated. I don't care. Right. So it's, even if both spouses are into it, of course you have an advantage if you know how it works, but that doesn't mean that, you know, everything that your spouse has been doing with their side of the cryptocurrency.
Billie Tarascio: Okay. So to sum up what I just heard. Coinbase is helpful as an exchange to [00:08:00] get information, but there is not an institution that we can just subpoena to get the documents, to get the information. The information is held by the spouse who is the investing spouse.
Julie LeBenz: Right. Because of all the transactions that can be made, you know, let's just.
Let's go walk through an example of how somebody could do some investments. So you start with an exchange such as Coinbase and Coinbase is connected to your bank account. There's some exchanges that allow you to use credit cards. So, you know, that's one place to try to get some information is through bank account and credit card records to start following the flow of transactions.
But you'll start with money either through credit or through your bank account. And that's going to go into your cryptocurrency exchange accounts, such as Coinbase. And from there you can purchase one or more cryptocurrencies. So let's say you buy one Bitcoin. Okay. Which Bitcoin is worth a lot, but [00:09:00] let's just for example, use Bitcoin from there.
You can take the Bitcoin and you can transfer it to your hard wallet. For example, um, one is called treasurer. There's another one called ledger. There's there's various ones. Those are the two most popular. So you can transfer it to your ledger, hard wallet from there. You could transfer it to a different exchange.
For example, there's one called Kraken. And you could transact with the Bitcoin there, maybe convert it to a different cryptocurrency from there. You could transfer it to a different wallet. You could go to a different exchange. There's just, there's a lot of different things that can happen. And people go to different exchanges because different exchanges have different cryptocurrency that is available to be purchased. So Coinbase doesn't offer access to every single type of cryptocurrency. And so the more sophisticated the investor, the more exchanges they're going to be on, because they're going to want to get into these more difficult to find [00:10:00] cryptocurrencies. So it can be a really complicated situation.
And this is where you can identify the type of investor. Are you dealing with somebody who in the crypto world, they call a hodler and that means hold on for dear life. Um, so a hodler is somebody who buys, transfers it usually to a hard wallet and just sits on it. So that's going to be an easier situation to deal with versus a trader.
Who's in and out and so different exchanges and doing all sorts of different stuff. Of course, there's people all in between on that spectrum, but that really is going to be one indicator of how complicated the situation is. Is this a hodler who's buying and holding or is this a trader?
Billie Tarascio: Okay, so when you said move to a wallet, My thought was that that is akin to, um, moving your stocks to cash.
But as you're talking, [00:11:00] I'm realizing that that is not what you're saying. So why would someone use a wallet instead of just leave it in something like Coinbase.
Julie LeBenz: Okay. So first there's two types of wallets. There's a hard wallet or a paper wallet, and the reason people transfer off the exchange is because they want to hold the asset in their own possession.
So people are, some people are weary. Oh, the exchanges we don't know. Um, if they're really as liquid as they say they are. And, um, you know, what, if they just shut down one day because the crypto market has been a little sketchy in the past, you know, as it's gotten on its feet. And so there ha you know, Mt. Gox was a big issue where crypto got taken away because Mt. Gox was an exchange that ended up filing for bankruptcy. So. Some people think it's safer to not keep it on the exchange, but to transfer into the hard wallet and the hard wallet you. It's in your possession and [00:12:00] it's this little device. One is like a rectangle shape.
The other, one's more of kind of a square with a triangle on the end. Um, but you plug it into your computer and you can do transactions. And so this is another layer of, of documents to potentially get in a divorce case, which is the transaction logs for the hard wallets. And these are, this is some of the language I've got in that YouTube video I put up last week.
That has proposed discovery requests to make, to get hard wallet, data, to get exchange Coinbase data.
Billie Tarascio: Well, hard wallet is a physical thing.
Julie LeBenz: Yes.
Billie Tarascio: Okay.
And is that why we hear about people losing millions and hundreds of thousands? Because if that wallet is gone, right, it's gone, you lose your crypto.
Julie LeBenz: Not necessarily those wallets have what's called private keys and the private keys are a series of 24 words.
It's literally like [00:13:00] dog bat hat. I mean, I sound like a cat in the hat book or whatever, but it's, it's a series of 24 words and if you have those private keys, you can reconstitute a lost wallet because it's on the blockchain. And I mean, I don't want to get into all the technicalities, but the problem is who has the private keys.
If that person passes away. And that information isn't written down anywhere, or the family doesn't know where to find it. That's a major problem. And then, you know, same thing here in the divorce context, who has the access information. And there's a lot of access information to get, I mean, Just for a Coinbase account, you have your username, your password, and then there's generally some sort of third party authentication, you know, app on your phone or a text message or an email.
So there's all this information you need just to get in the accounts. And, um, a lot of that comes up to be a big problem and, you know, a probate and [00:14:00] estate planning context, but as far as divorce, the access issue. Comes up as far as, okay. Who's going to be the one producing the records and sharing this information.
And can we trust that they're sharing all of it in an accurate way? I have not tried to subpoena Coinbase for example, so I'm not sure how that would go, but, um, certainly that would be a potential avenue.
Billie Tarascio: Well, you know, as you're talking, I'm remembering why I eventually sold Bitcoin and said, I'm better off just investing in my business and stocks in this. Cause I couldn't get into Coinbase. I couldn't get into my own account forever. The app didn't work, I got her new phone and it is so hard to access this information. And so what that, what that indicates to me is that. A spouse, who is the investor spouse, who has the control and the knowledge could really easily just not give you the information.
And realistically, are we at a [00:15:00] point where we know what judges are going to do?
Julie LeBenz: We don't. And, um, that's the thing is they could give you part of the information. Oh, here's information from three different exchanges in three different wallets. And that's it. But lo and behold, there's three other exchanges and three other wallets that nobody knows about.
And that's where diving into the bank records. And the credit card records could be helpful because when you open an exchange account, you generally, you know, you need a. And so that funding has to come from a bank or a credit card. So that can be a good starting point, um, to really dive in, you know, like a forensic accounting, because on your credit card or bank statement, it'll show, you know, Coinbase or, you know, whatever the exchanges and we'll show that transaction.
We should. Yeah. I mean
Billie Tarascio: the amount of money that was invested fairly easily, but once it's gone, how do we know. [00:16:00] If there's more, does forensic accounting even work?
Julie LeBenz: I mean, there are cryptocurrency forensic accountants out there, so yeah, but of course it's all about the data you have. So if you have sufficient records, then somebody with the knowledge could put together a really good report that's reliable, but it comes back to that.
Do you have all of the information? Great.
Billie Tarascio: All right. So it's also very clear to me that if someone is not, if somebody is wanting to hide money, this might be the very best way to do it. I mean, that's the obvious. If our listeners need to understand that that's the obvious answer here. It's going to be easier to find this than any other type of investment.
Julie LeBenz: With the, again, it depends on that level of sophistication for the investor spouse. If they're the handler that bought held then yeah. I mean, that's relatively straightforward [00:17:00] and something that should be able to be tracked down, identified, divided, you know, relatively easily. But if you've got a suppose that number one once to hide the property and is sophisticated, then yeah.
That's going to be a tough case. And as lawyers, you know, that's really something you're going to want to consider in those intake meetings. Is this a client and a level of sophistication you're willing to take on, you know, or that you're competent to take on because this could get highly complicated.
Billie Tarascio: The other issue that is blaring in my mind is valuation date. And here's why,
and I'm just explaining this for our listeners. Um, community property is community property. If it's acquired during the marriage, it gets divided equally after the date of service, the community ends and any money that I earn. From my work is my [00:18:00] own.
But there's arguments on both sides here. If I'm the trading spouse, I'm going to argue any money that that money has made since the date of service is my own because I made the decisions and it's my work and the community had ended and the other spouse is going to argue, um, it was community, it's an investment subject to gains and losses.
What are your thoughts on that? And I
hope that that was clear for our listeners.
Julie LeBenz: Yeah, there's been some recent, um, rulings out of the Arizona court of appeals about data valuation. And they essentially say it's a case by case analysis. You know, they really didn't give us any sort of hard, fast rule to follow it's.
This baseline of what's fair. And in cryptocurrency, you know, what is fair? Is it fair to use the all time high price that hit last year? And maybe that's right around the time the divorce was filed, but since then it's lost, you know, nearly half the value and. So, yeah, I, it's going to be a really tough issue that in [00:19:00] my mind would be best to negotiate and work out.
I think this is something at the outset of the case that would be really good to talk about. And it needs to be talked about in terms of what's going to happen with this crypto. Are we selling it? Are we keeping it and dividing it is one spouse going to keep it and pay the other out. You know, if you're just dividing it in the valuation issue, isn't so pressing, but if one spouse is keeping it or it's going to be sold, then the valuation issue is very big.
And, Likely as a lawyer, you need to probably write a letter to your client explaining, you know, I can't, I'm not your financial advisor, so I can talk to you about these issues. I want you to be cognizant of them, but I'm not going to be able to identify the best date to sell. You know, I mean, nobody has a crystal ball, but I could see some clients having an unreasonable expectation, you know, especially if there is a lot of volatility in the market.
So it might be good to establish those clear boundaries at the outset. [00:20:00] Um, Yeah, it's just like any investor. It's, it's really just a roll of the dice. But as lawyers, I think we are in a bit of a precarious position because, you know, people could look to blame us for the actual value at the time of sale.
And that obviously is completely out of our control.
Billie Tarascio: Okay. So you also mentioned dividing the crypto in kind. What that means for our listeners. There's a lot of different ways that this can be divided, right.
Can you explain that?
Julie LeBenz: Well, I've got, I have three suggestions. The first one would be to award all the crypto to likely, you know, the investor spouse, they likely would want to keep it and then they would need to pay their spouse.
You know, usually it's 50% of the value. Sometimes it can be a different percentage, but let's just go with the standard of 50%. And so of course in that situation, What, what valuation are you going to use to determine how much the other spouse has paid? Um, number two, you could divide in [00:21:00] kind. So you've got your list of all the cryptocurrency and you divide it up and assign certain cryptos to each spouse.
Now, this is easier in a certain regard because you don't have to worry about the valuation issue, but you need to be really cognizant of the decree language for this outcome, because. If you just say 50, 50 division. Well, what if there's 20 different cryptocurrencies? Like who exactly is getting what? And also who's responsible to make the transfers and by when.
You know, I would want some really clear language in there explaining. Um, so such and such spouse has to do this. You'd make these transfers by when I would also suggest that two new wallets be issued because you don't know who has access to the, the, to the information to access the wallets that were used during the marriage.
So for security purposes, if it's going to be divided in kind, I would say, get a brand new wallet, a brand new hardware. And it'll come with an associated address [00:22:00] and have the crypto transferred to that new hard wallet. So there is no security concerns that the other spouse may have access to a wallet that your cryptocurrency has put on.
Billie Tarascio: Um, before you go any further, like how does transferring ownership work? And the only thing that people are going to be able to compare this to is a QRDO for dividing retirement funds or like a bank. So, can you explain how transfers of ownership actually happen? Yeah.
Julie LeBenz: So this is where the decree language is so critical.
And also, you know, as lawyers, when we're writing this decree language, you should be thinking about where is the crypto? Is it on an exchange? Is it in a hard wallet? Is it in a paper wallet? Um, because. That's going to be part of the instructions. If, if it's on the exchange, then the account [00:23:00] holder would need to be instructed to transfer a certain amount of cryptocurrency to an address associated with a wallet or another exchange account for their spouse.
If the cryptocurrency is on a hard wallet, then it needs to go from the
, either to an exchange and then to another wallet or an exchange or to the wallet, to another wallet. So this is again where you really need to map out where is the cryptocurrency who is getting, what and what steps need to be taken to make these transfers.
There is no title that gets transferred, but if you're taking crypto. A wallet you own and transferring it to a wallet and somebody else's possession, then whoever's in possession of that. Wallet is going to be in possession of the crypto.
Billie Tarascio: I see. Let's take a minute here. So instead of the crypto being Billie Tarascio is crypto it's [00:24:00] wallet a is crypto, and whoever has wallet a is the owner of the crypto.
Julie LeBenz: I mean, owner, you know, possession is what, 99 tenths of the law or whatever. So yeah, you're in possession. You would be able to transact with it. Of course, legally there could be another analysis of who the actual owner is, but yeah, you're in possession and so you're able to transact with it and the possession is going to be key.
Billie Tarascio: It really is unlike other. It really is hard to get your mind around because you know, my bank account is my bank account and if I transfer money out of it into, into my spouse's bank account, then I'm, I'm kind of transferring ownership but it's not like I can take money in my bank account. I guess it's like cash.
Right. I guess I could take money out of my bank account, put it into cash that would be with the wallet was like cash. And then whoever has the cash owns cash. Maybe that's the best way to think about it. That's helpful for [00:25:00] our listeners, but you know, it's. Such an interesting new way to think about money and assets and it's not going anywhere, which is why I'm so happy that we're talking about this.
Okay. So that was two options. And you said there's three options to divide it. What's
the third option.
Julie LeBenz: So the final option would be to sell all of the cryptic. And divide the net sale proceeds. Um, a sale is going to be subject to tax consequences. So it's either going to be a short term or a long-term capital gain.
And this is something to really be cognizant of as a lawyer, if you're looking to sell, because there could be a huge difference in taxes between long-term and short term. So of course, this contemplates that you have a gain. But if there is a gain and you're going to sell, then it needs to be determined.
When was that cryptocurrency purchased and has a year or more transpired since the purchase? Because if a year or more has transpired, it's going to be at a 15% capital gains, the long-term rate. [00:26:00] But if short-term is at your tax rate. Whatever your income tax rate is. So 20%, 30%, you know, depending on what tax bracket you're in, that's going to be a lot higher than 15%.
So the selling again can be an easier option because you don't have to figure out, um, who's getting what or. Do all the transfers. You can just go on the exchange and sell, but you've got that same issue of, well, what date are we going to sell? Um, and then making sure that the taxes get paid and the net sale proceeds are divided.
Um, so again, having some specific language in the decree, not just sell it all, like I don't, that could cause some post decree litigation, um, which nobody likes being involved in. Like you think it's over and it just keeps going. Um, so that language is to be clear.
Billie Tarascio: I can absolutely see a judge just saying I'm ordering this person to sell all the crypto and without anything else, [00:27:00] which would be a potential disaster.
Julie LeBenz: Yeah, there needs to be some, a lot of specific language here just saying, you know, divide 50 50, or selling and divide. I think that's going to open up some complications.
Billie Tarascio: Do you recommend, who do you bring on your team in terms of, you know, taxes and, uh, financial advisors and valuation experts? Like who are you who was on your team for a complicated case.
Julie LeBenz: So you want to connect with a CPA that understands crypto because not all of them do. And so you'll want to connect your client to a CPA if they aren't already connected one who understands. And then there's a lot of emerging people who are making a name for themselves in this crypto world. So, um, one other thing to mention, as far as finding records, another.
Potential avenue for the non investor spouse [00:28:00] is to go to the CPA because if the marital community has done proper tax reporting related to their cryptocurrencies, then they've likely provided their CPA with their transaction logs. And so the non investor spouse, you know, rather than going through all of this hoopla to get records may be able to just go to their CPA and say, Hey, can you provide me with copies of, um, our crypto con cryptocurrency transaction logs that have been used in our last three years tax returns or whatever the logs are not going to be a part of the tax return.
It's going to be, you know, the supporting records. That the CPA uses to put together the tax return. So that's another place to look for records instead of like subpoening like Coinbase, which, you know, maybe a really difficult , path to go down.
Billie Tarascio: That's a great point and one follow up. Where would the spouse look on the tax return?
To get information about [00:29:00] whether or not there is crypto.
Julie LeBenz: Um, I don't know, like the exact page, but I'm more saying go to the CPA that prepared the return and ask them. If you know, that cryptocurrency was invested in, then I'd be asking, Hey, do you know, did we, did we put that on our tax return? And do you have those transaction logs?
Not everybody does proper tax reporting with cryptocurrency and that this is another potential pitfall for us divorce lawyers, as, you know, getting involved in a case and thinking it's so much straight forward. And then finding out that no tax reporting has been done and there's been thousands of transactions.
Uh, oh, this could be a major tax issue. Um, there's some people who have done all of that. And now they're trying to just like sweep that under the rug and start a new LLC and start trading through that LLC and do the reporting because there's. Cryptocurrency regulation on the horizon that [00:30:00] people are anticipating.
But again, this is like pretty complex stuff, trader stuff, but there is a potential problem for people who have not done proper tax reporting for their cryptocurrency, if they've taken profits along the way.
Uh, okay. So only you only have to report it on your taxes. If you've taken profits, meaning you've sold and you've gotten gains right.
Or,
Billie Tarascio: or no.
Julie LeBenz: I don't know, you know, I don't know if you would have to report a loss or what all you have your tax reporting obligations are, but certainly if you've had a gain that would trigger a tax liability, so.
Billie Tarascio: Good stuff. Really good stuff, Julie, thank you so much for coming on the show. I know my head is spinning a little bit.
Yeah, this is usually what happens when I dive into crypto is I realized there's just so much more to learn, which is why I really appreciate your expertise and your knowledge. If you all have enjoyed this show, make sure to like it, give it a review. And Julie, how do people
find you? [00:31:00]
Julie LeBenz: Um, well, you can go to my website, which is Levin's law.com, um, and on Facebook and on YouTube, um, LinkedIn.
So feel free to connect with me there. Thank you so much.
Thank you.