Cryptocurrency, once known only to a relatively small number of enthusiasts, has been popularized over the last few years, encouraging casual investors to put money into digital currencies. As the number of individuals holding cryptocurrency assets has grown, the likelihood of those assets forming part of the discussion around divorce settlements has also increased. For effectively handling cryptocurrency in divorce, it is essential to understand how it differs from traditional financial assets so that crypto assets can be appropriately identified and valued and the implications of how such assets are allocated can be planned for. Today in this article, we will be discussing the main points within cryptocurrency and divorce settlements as well as answering the most frequently asked questions on this matter.
- Cryptocurrency Basics
- Cryptocurrency and Divorce Concerns: Hiding Assets?
- Valuation and Tax Implications
Cryptocurrencies are digital (virtual) currencies that use cryptography to verify and record transactions via a decentralized system. They are not issued by a central authority like a government and do not require banks or other financial institutions to conduct transactions. Bitcoin, released in 2009, is widely considered to be the first cryptocurrency, but as of March 2022 there were more than 9,000 other cryptocurrencies in the market.
Most cryptocurrencies maintain a public, anonymized ledger via blockchain technology that records all transactions. Cryptocurrency owners conduct transactions via a “wallet” that allows them to manage their crypto assets; each wallet has a public key and a private key associated with it. The public key is a cryptographic code viewable by others that allows them to send funds to the owner’s wallet and to see their wallet balance. The private key (similar to a password) is used to verify transactions and prove ownership of an individual’s holdings.
Because cryptocurrency is not based on a physical asset or backed by a national economy, its value is based on supply and demand. As such, the price tends to be highly volatile, making it more akin to gambling than investing. This can make valuation for the purposes of a divorce settlement difficult, as discussed below.
Cryptocurrency and Divorce Concerns: Hiding Assets?
Like any other financial asset, cryptocurrency holdings are legally required to be disclosed during divorce proceedings. However, should one spouse be willfully hiding assets through the use of cryptocurrency, it can prove more challenging to track and prove ownership of than traditional assets such as bank accounts, stocks, or bonds.
For example, even if a spouse is aware of (or suspects) that an undisclosed cryptocurrency investment exists, they may have no idea how to access the account. The decentralized nature of cryptocurrency also means there is no single authority to which to direct a subpoena to compel the disclosure of records. Further, although it might be possible to obtain records from a U.S.-based exchange such as Coinbase, if the investment was made through an exchange in a foreign country, there may be no legal recourse to obtain disclosure. Transactions may also have been made peer-to-peer rather than through an exchange, making them more difficult to track if key information, such as the wallet address, is unknown.
If significant amounts of money are missing or if financial disclosures do not realistically match income, it may be worthwhile to employ a forensic accountant to examine financial records for evidence of possible cryptocurrency investments or other hidden assets. Other forensic experts may also be able to obtain public or private key information from a spouse’s electronic devices. The cost of doing so should be balanced against the suspected value of their findings; most cryptocurrency investors hold very little, so it is possible an investigation will cost more than the asset is worth.
Valuation and Tax Implications
One of the primary issues with divorce settlements and cryptocurrency is determining its value. This can fluctuate considerably from day to day, making the fair division of property more complex. It is essential to come to an agreement on how digital assets will be valued, whether the market value is taken on a certain date, taken as an average over a certain period, or determined by some other means. This allows it to be weighed against other marital assets to be divided in the settlement.
For federal income tax purposes, the Internal Revenue Service treats virtual currency as property, and general tax principles for property transactions apply. The sale of cryptocurrency is reportable on tax returns on Form 1040, Schedule D, as a capital gain or loss. This should be taken into consideration when determining if one party wishes to retain ownership of the cryptocurrency or not, or if it is to be divided. If crypto holdings are to be sold, capital gains tax liability may be realized; how the transaction is handled will determine whose name the capital gains will be reported under.
There is no single right way to handle cryptocurrency assets as part of a divorce. How to do so in each case depends on each spouse’s preferences and risk tolerance. Understanding the unique risks and potential tax impact, however, can help in creating a more equitable settlement.
Navigating Divorce with Cryptocurrency assets?
Settling the financial details is often one of the most contentious parts of a divorce. Dealing with crypto holdings can make that even more complicated, especially if they form part of an effort to conceal assets. The family law firm of Hoover Krepelka understands the nuances of how cryptocurrency holdings can affect a divorce settlement, as well as how it can potentially be used to subvert accurate disclosure of marital assets. If you’re facing divorce, we can help advocate for your fair share of financial assets. Contact us today to schedule a meeting with an attorney or you can fill out the form below.
FAQ Questions for Cryptocurrency and Divorce Settlements
Q: Can cryptocurrency assets be included in alimony or spousal support calculations?
A: Yes, cryptocurrency assets may be considered when calculating alimony or spousal support, particularly if they contribute significantly to the overall financial situation of the parties involved.
Q: If I invested in cryptocurrencies before marriage, will they be considered separate property?
A: In many jurisdictions, assets acquired before marriage are considered separate property. However, if there have been significant contributions or commingling of funds during the marriage, the situation may become more complex.
Q: What happens to losses incurred from cryptocurrencies during the marriage?
A: Cryptocurrency losses incurred during the marriage may be considered as part of the overall financial picture during property division. They can impact the distribution of assets and liabilities.