Cryptocurrency can present unique identification, tracing, and valuation issues in divorce. Unlike assets held in a traditional bank or brokerage account, digital assets may be held in a custodial account with a cryptocurrency exchange or other platform, maintained in a self-custodied wallet, or transferred between the two. These different forms of custody can affect the records available to identify, trace, and value the assets.
The underlying financial questions, however, are familiar. What digital assets can be identified? What funds were used to acquire them? Where were the assets transferred? What were they worth on the relevant date? And what can the available financial information actually establish?
Cryptocurrency is a type of digital asset recorded on a cryptographically secured distributed ledger, such as a blockchain. For federal income tax purposes, the IRS treats digital assets as property. The treatment of a particular digital asset in a divorce depends on the applicable legal framework and the facts of the matter. Under Illinois law, property acquired by either spouse after the marriage is presumed to be marital property, subject to specified exceptions. The court is required to make specific factual findings regarding the classification of assets as marital or non-marital and their values.
Forensic accounting can assist with the financial side of these questions by identifying potential digital-asset activity, tracing funds and transactions, reconciling information from different sources, and valuing supported holdings as of a relevant date.
Identifying and Tracing Cryptocurrency
Identifying cryptocurrency often begins with traditional financial records rather than the blockchain itself. The objective is to identify financial activity or other information that may indicate the existence of digital assets and then follow that activity through the available records.
Relevant records may include:
- Bank and credit-card statements showing payments to or receipts from cryptocurrency platforms
- Exchange account statements and transaction histories
- Tax returns and supporting information reporting digital-asset transactions
- Wallet addresses and transaction identifiers
- Personal financial statements and loan applications
- Business accounting records
- Records supporting purchases, sales, transfers, or conversions of digital assets
No single record necessarily provides the complete financial trail. A bank transfer to a cryptocurrency exchange, for example, may establish that funds were sent to the platform but does not by itself identify the digital asset purchased or what subsequently happened to it. Exchange records, wallet activity, tax information, and other financial records can be compared to corroborate transactions and reconcile the movement of funds and assets.
Federal tax returns can provide an additional source of information, but they should not be viewed as a complete inventory of cryptocurrency holdings. Federal income tax returns include a digital-asset question concerning certain transactions, and reportable digital-asset transactions may also appear elsewhere on the return.
Comparing independently created records over a defined period is how undisclosed accounts and property are identified more generally, which we describe in our explainer on how to find hidden assets in divorce.
Exchange-Held and Self-Custodied Assets
The records available for the analysis depend partly on how the cryptocurrency is held.
Assets maintained through a custodial exchange may have account statements, transaction histories, and deposit and withdrawal records. These records can help trace funds into the exchange, identify which digital assets were purchased or sold and in what amounts, and track subsequent transfers to other accounts or wallets.
Self-custodied assets present a different record set. Instead of relying primarily on an institution's account records, the analysis may involve wallet addresses, transaction identifiers, blockchain activity, and records showing how the wallet was funded. The absence of a traditional account statement does not mean that the activity cannot be analyzed, but it can require information from multiple sources to establish the relevant financial trail.
Tracing the Movement of Funds and Assets
Cryptocurrency may move between exchanges and wallets. An asset purchased through an exchange may later be withdrawn to a self-custodied wallet, transferred to another wallet or exchange, converted into another digital asset, or sold. As a result, a transfer out of an account or wallet is not necessarily the end of the financial trail, and reviewing only the original exchange account may provide an incomplete picture.
Once relevant activity has been identified, transactions can be traced across the available records. The process is fundamentally a reconciliation exercise: transactions appearing in different sources are compared based on factors such as amount, timing, asset, wallet address, and transaction identifier. Where the records support a connection, the movement of funds and assets can be documented.
What the Financial Record Can and Cannot Establish
Blockchain technology creates a transaction record that differs from a traditional bank ledger. Public blockchains generally maintain distributed, tamper-evident records of transactions that can remain publicly accessible after a transaction occurs.
That transparency can be useful in forensic analysis, but it should not be confused with complete transparency about the people involved.
For example, a blockchain record may provide information concerning a wallet address, the date and time of a transaction, the quantity transferred, the sending and receiving addresses, and the history of activity associated with those addresses. This information can help establish that a particular transaction occurred and assist in tracing subsequent movements of an asset.
What the blockchain record does not necessarily establish is the identity of the person who owns or controls an address. Although transactions may be publicly visible, the identity of the user associated with an address is not inherently disclosed by the blockchain. Accordingly, a record showing that cryptocurrency moved to a particular address does not, standing alone, establish who owned or controlled that address. Similarly, the absence of a known wallet address does not establish that no digital assets exist.
Other records may help make those connections. An exchange withdrawal may correspond to a blockchain transaction, while a later deposit may connect the same wallet to a known exchange account. Banking, tax, business, device, or other records may provide additional information. The strength of the conclusion depends on the information available and how consistently the different records fit together.
Incomplete or Inconsistent Records
Not every cryptocurrency trail can be completely reconstructed. Exchange records may cover only part of the relevant period. A wallet address may be known without sufficient information identifying who controlled it. Transactions may move through wallets for which no additional records are available. Account balances may also differ from what would be expected based on the transactions produced.
These gaps and inconsistencies should be identified and investigated, but they should not automatically be treated as proof of what occurred. A transfer to an unidentified wallet, for example, may establish that an asset left a known account. If the available information does not establish who controlled the destination wallet or what subsequently happened to the asset, the analysis should distinguish the documented transfer from the unanswered questions that remain.
A sound forensic analysis therefore distinguishes among documented activity, activity corroborated through other records, and transactions or balances that remain unexplained. Where the available information no longer supports the tracing path, the analysis should identify that limitation rather than fill the gap with an assumption.
Valuing Cryptocurrency in Divorce
Identifying and tracing a digital asset does not necessarily answer the separate question of its value. Cryptocurrency prices can change materially over relatively short periods, making the valuation date and the information supporting the quantity held particularly important.
The valuation date depends on the assignment and governing legal framework. The financial expert applies the specified valuation date rather than independently determining the legal date on which the property should be valued.
Once that date is established, the analysis generally requires the specific digital asset, the quantity supported by the records, an appropriate pricing source, and the date and time associated with the price used.
Where the marital estate also includes an interest in a closely held business, the value of that interest is addressed separately in our business valuation in divorce services.
Quantity and Pricing
Pricing also requires consistency. Unlike traditional securities markets with defined trading hours, many digital assets trade continuously across multiple exchanges. As a result, the same asset may have slightly different quoted prices at the same time depending on the exchange or market-data provider. The price may also change materially over the course of a single day.
The analysis should therefore identify the source from which the price was obtained, the date and time represented by that price, and the basis for selecting that price. Depending on the assignment, this may involve using a price quoted by a particular exchange or a market-data provider that aggregates information from multiple exchanges. Whatever source is used, it should be applied consistently to the quantity of the asset supported as of the relevant valuation date and time.
Valuation Limitations
The reliability of a cryptocurrency valuation depends on the underlying records. A precise market price is of limited use if the quantity held on the valuation date cannot be established. Incomplete transaction histories, unidentified wallets, or transfers between accounts or wallets near the valuation date may make it more difficult to establish the quantity and location of the assets held as of that date.
Precision in the calculation cannot cure uncertainty in the underlying records.
Readily available market pricing can create the impression that valuing cryptocurrency is simply a matter of multiplying a quantity by a quoted price. In disputed matters, however, establishing the quantity held and whether the asset was held on the relevant valuation date may be the more difficult part of the analysis.
How a Forensic Accountant Approaches Cryptocurrency in Divorce
The appropriate procedures depend on the financial questions presented and the records available, but the analysis generally follows the same disciplined process used in other forensic accounting matters.
Define the financial questions and relevant period
Identify the transactions, holdings, accounts, and other financial issues requiring analysis, together with the period under review and any applicable valuation date.
Identify and collect relevant records
Gather banking, credit-card, tax, exchange, wallet, business, and other records relevant to the analysis. The initial review may identify additional accounts, platforms, wallets, or transactions requiring further information.
Reconcile activity across available sources
Compare transactions across records to match deposits, withdrawals, purchases, sales, and transfers. Identify differences and gaps that cannot be reconciled.
Trace supported transactions
Follow transactions where the records establish a connection. This may include tracing funds from bank accounts to exchanges and following digital assets between exchanges, wallets, and other accounts.
Value supported holdings
Where valuation is required, determine the quantity supported as of the valuation date and apply appropriate pricing information for that date and time.
Report the findings and limitations
Distinguish documented and corroborated activity from transactions, holdings, or balances that remain unidentified or unexplained, and identify limitations in the available information.
The role of the forensic accountant is to analyze the financial information. That may include identifying indications of digital assets, tracing transactions, reconciling records, quantifying holdings and transfers, and determining value based on the valuation date and information available for the assignment.
Those findings do not necessarily answer legal questions. Issues such as whether an asset is marital or nonmarital property, who legally owns an asset, whether disclosure requirements have been satisfied, or how property should ultimately be divided are matters for counsel and the court under the applicable legal framework.
Cryptocurrency changes some of the records and methods used to trace financial activity, but not the need for a disciplined financial approach. A sound analysis follows the financial trail as far as the available information supports it and clearly distinguishes what can be established from what remains uncertain.
The broader scope of that work in a marital dissolution matter is described under forensic accounting in divorce, and the explanation of findings in deposition or at trial under litigation support.
