Dividing Digital Assets in a Divorce

Digital platforms have transformed every aspect of our lives, leading to an entirely new classification of assets. Now, we must account for this intangible, digital property in a divorce. When a marriage dissolves, the couple must decide how to divide digital subscriptions, cryptocurrencies, online gaming accounts, online music libraries, and more.

This article explores the process for distributing digital property in a divorce.

Types of Digital Assets

In a divorce, you must identify which assets to divide. “Digital assets” include anything that exists in a binary format. Put simply, they exist as computer files. You may be able to access this information from a streaming service or website, or you could store it on a hard drive, disc, USB, etc.

This broad definition covers a range of items, including:

  • Music
  • Videos
  • Pictures
  • Video games
  • Cryptocurrencies like Bitcoin and Ethereum
  • Written documents like Word or Adobe files
  • Businesses that operate exclusively on the web

The term “digital assets” can also extend to digital rights, such as:

  • Social media accounts
  • Copyrights and patents
  • Access to streaming content sites like Netflix or Spotify
  • Video game accounts (You can purchase and download games, but these files are tied to a specific account. Most services do not allow you to transfer the right of use.)

Ownership of Digital Assets

After you identify the digital assets that exist in your marriage, you must establish who owns which items. Doing so includes assessing the value of each asset, which can be a complex process. Ownership generally centers around who has control over the digital asset.

However, marriages also contain “marital assets.” This is property that either marriage partner purchased. Regardless of who paid for it, the asset belongs to each partner equally. Therefore, if you purchased any digital asset while married, your spouse may be able to make a claim for ownership in a divorce.

Valuing Digital Assets

In a divorce, you must establish who owns which asset and the value of that asset. Valuing digital assets is challenging due to their volatile nature and the rapid pace of technological change. For instance, an online business might have fluctuating revenues, and the value of digital rights depends on market demand.

As with any investment, you will need an attorney’s help to decipher how much each asset is worth in your divorce.

The Legal Approach for Digital Asset Division

Ultimately, the court should treat digital assets the same as it would any other property. Any investment can fluctuate in price, and the court is prepared for that fact. Therefore, you should be able to follow the same processes for digital assets with rapidly changing values.

Furthermore, the court should use the same system to divide physical and digital assets.

Property Division in a Divorce

When it comes to splitting assets in a divorce, state laws vary significantly.

Equitable Property Division

Most states follow the equitable property division model. This system attempts to divide assets fairly, not necessarily equally.

Equitable property division considers multiple factors, such as:

  • The length of the marriage
  • The income and earning potential of each spouse
  • The contribution each spouse made to the property itself
  • The contributions each spouse made to the household and family

Community Property Division

Far fewer states still use the community property, or “equal,” division model. This system attempts to divide all marital property 50/50. This approach can benefit couples with similar incomes and assets, but it creates complications for those with differing financial situations.

California is a community property state.

Strategies for Equitable Division

Even if you live in a community property state, you are free to create your own property agreements with your spouse. Here are some suggestions for keeping property division equitable.

Asset Liquidation

Asset liquidation refers to the process of converting assets into cash or, more simply, selling an asset. Liquidation might seem like a straightforward way to divide assets. However, market conditions may not be favorable, leading to losses.

Dividing Assets Based on Entitlement

In a divorce, spouses often claim entitlement to certain property. This process involves determining who has the legal right to own certain assets.

For instance, one spouse may have made significant contributions to a shared business or household, leading to a stronger claim over this property.

When dividing digital assets, it may be necessary to claim rightful ownership. For instance, imagine a family where one spouse is a dedicated gamer. They use the game system frequently, and they buy all the digital software. Even though that software is technically a martial asset, the spouse who uses it most often can claim that it is rightfully theirs, and they should be able to keep it after the divorce.

Tax Implications of Dividing Digital Assets

Transferring ownership of certain digital assets can trigger tax events, resulting in significant liabilities for either party. A digital asset with significant value could be taxed to the point where keeping it doesn’t benefit anyone.

When working toward a fair asset division, couples should work closely with attorneys to make sure taxes don’t create problems.

Navigating Privacy Concerns When Dividing Digital Assets

Information stored online is sensitive. It can contain personal data or financial records. Distributing this property requires careful consideration. Spouses must prevent unauthorized access and potential misuse.

As part of your division plan, you must account for things like passwords. Working with your attorney, you can create provisions that block either party from accessing certain assets until after property division ends.

Managing digital assets in a divorce is a complicated process, and Palmer Rodak & Associates is up for the task. We help with all types of asset division, so contact us online for a free consultation. You can also call our office at (760) 573-2223.