July 6, 2022
  • July 6, 2022

Dividing Cryptocurrency In A Divorce Settlement Is Complicated

By on May 28, 2021 0

STR | NurPhoto | Getty Images

Cryptocurrency has increasingly become a factor in divorce settlements as bitcoin, dogecoin, and other types gain acceptance and rise in values.

Over 20 million Americans may own cryptocurrency, industry groups estimate, and the market value of digital currency hit $ 2 trillion for the first time in April.

Whether the spouses have received or invested large sums, cryptocurrency can add challenges when the couple is breaking up.

“Cryptocurrency has added a layer of complexity,” said certified financial planner Davon Barrett, senior advisor at Francis Financial in New York.

Learn more about Personal Finance:
Bitcoin crash opens door to tax loophole for investors
Want to get exposure to bitcoin without owning cryptocurrency yourself?
Biden’s plans could drop tax bomb on divorcing couples

Here’s what divorced people need to know.

Couples may need a professional with cryptocurrency expertise, according to Ivory Johnson, a Washington-based CFP and founder of Delancey Wealth Management.

For example, some divorce lawyers have more knowledge and experience with digital currency, with better information on how to proceed with the settlement, he said.

Cryptocurrency volatility

One of the tricky parts of dividing cryptocurrency is determining value.

Digital currency worth $ 200,000 can drop to $ 100,000 or reach $ 400,000 during the divorce process, Johnson said.

Spouses can prepare by adding some type of volatility formula to the divorce contract, he said.

For example, if the value changes by “X” percent, there may be a corresponding change in how they divide other assets.

“You’ll want to keep this as a moving target as you go through the process,” Barrett said.

Tax considerations

Taxes are another aspect to consider in divorce negotiations, Johnson said.

For example, a spouse who bought Bitcoin may have experienced significant growth four or five years ago, subject to long-term capital gains taxes when sold.

As couples negotiate, they may have to factor in their post-divorce tax bill, Barrett said.

Other problems can arise if one of the spouses does not report their cryptocurrency income to the IRS, a common problem before digital exchanges send out tax forms, Johnson said.

If you need to share this key for the [divorce] process, keep it to a minimum.

Davon Barrett

senior advisor at Francis Financial

If the IRS comes back with questions years later, it can have an impact on couples who filed taxes jointly, even if one of the spouses was not part of the original transactions.

A spouse can avoid trouble by requesting an affidavit from their ex-spouse. The document may indicate that their ex-spouse had no unreported income, he said.

The Treasury Department announced new crackdowns on cryptocurrency reports last week.

Asset transfer

After signing their divorce papers, couples may have a new challenge: transferring cryptocurrency from one spouse to another.

While traditional investment firms know how to divide assets for divorce, some cryptocurrency exchanges may have less experience, Johnson said.

Additionally, these exchanges may have smaller customer service teams to resolve issues.

Couples should hire a financial professional to handle the cryptocurrency transfer, Johnson said.

“It’s not something I would recommend either spouse to do,” he added.

Once a couple hires a third party, it’s critical to protect their private keys – passwords to access and manage digital currency – or they can risk of losing access to funds.

“If you need to share this key for the [divorce] process, keep it to a minimum, ”Barrett said.