How Do You Decide Cryptocurrency in a Divorce?
Dividing Cryptocurrency in a Divorce Can Be Surprisingly Tricky
Right now, there is roughly $1.8 billion worth of cryptocurrencies in circulation. This new type of currency can be volatile and very high value, so it is no surprise that it can become a hotly contested issue in divorce. There are several things that you need to consider when trying to divide cryptocurrency with your ex.
Determining Actual Value Can Be Hard
The biggest pitfall is simply figuring out how much cryptocurrency is worth. When dealing with asset division during a divorce, your divorce lawyers will usually follow these steps:
- Determining whether each piece of property was obtained before or during the marriage
- Finding the value of all the marital property
- Discovering an equitable division for all the marital property
- Seeing whether one partner needs alimony because their share is not enough to support them fairly
- Figuring out how much a person should pay in child support by looking at their income and assets
As you can see, much of asset division relies on knowing how much money each person has and should have. Cryptocurrency is volatile. The same crypto could randomly be worth $400,000 more one day and worth $100,000 less the next week. It is necessary to find a fair way of accounting for all this volatility. There are several different ways that people can try to account for all of this volatility. A few options include:
- Each partner can just take half of the total amount of cryptocurrency coins and then focus on other assets when determining things like child support or alimony.
- Both people can agree to liquidate the cryptocurrency and then just add the funds to the rest of the cash that needs to be divided.
- One spouse can ask to keep all the cryptocurrency, with the understanding that other asset divisions may change based on how value fluctuates before the divorce is final.
- One person can keep all the cryptocurrency in exchange for another spouse having a very desirable asset.
Cryptocurrencies Are Easier for Your Spouse to Hide
Another potential concern with cryptocurrencies is just finding them. Since they are not a physical asset like cash, gold, or jewelry, it is not something you would have lying around the house. And unlike bank accounts or an IRA, cryptocurrency is not an extremely recognizable financial asset. An unethical partner could choose to hide the fact that they own cryptocurrency when disclosing assets. Even if you think to ask about common cryptos like Bitcoin, you might miss asking about smaller investments like Ethereum or Dogecoin.
Many cryptocurrencies are meant to be anonymous, so believing that there is hidden cryptocurrency in a divorce can be hard to prove. If you suspect that your ex has cryptocurrency that they are not mentioning, your lawyer may need to file a subpoena to see if they can access their electronic devices. Here are a few of the things that your divorce lawyer will look out for if they suspect that your partner is hiding money in cryptocurrency:
- Sudden lifestyle changes that do not make sense with your estranged spouse’s reported income
- Suspicious amounts of money leaving bank accounts and not being accounted for
- Listing cryptocurrency on past loan applications to get approval
- Past tax returns that include mentions of cryptocurrency
- Emails or software on your family computer that are related to cryptocurrency purchases and transfers
- Stored login credentials for a digital wallet
Trying to Cash Out Cryptocurrency Can Lead to Tax Issues
Because of the volatility of cryptocurrency, many couples prefer to just liquidate it. This does make it easier to split crypto in a divorce. However, it does mean that you will face some other financial challenges. When you sell cryptocurrency that has appreciated in value, you might face capital gain taxes. Meanwhile, if the cryptocurrency has depreciated in value, you can use this to get a better tax refund. All of these factors have to be taken into account. The tax impact can lead to considerations such as:
- The spouse who gets liquidated cryptocurrency will not get quite as much once taxes are considered. This may affect how other assets are divided.
- Partners who want to file separately following the divorce may disagree on who has to pay cryptocurrency taxes or who gets deductions.
- Years after the divorce, the IRS could come after both people if one partner during the marriage failed to correctly pay taxes for their cryptocurrency. Asking for an affidavit to absolve the unrelated partner of any liability can become a major sticking point in negotiations.
- A person who is less familiar with this new technology may fail to realize that the money they got in a divorce came from cashed out cryptocurrency. This can lead to a surprise tax bill that causes more disagreements in the future.
Forgotten Cryptocurrency Can Lead to Major Issues Later On
Unlike most other types of assets, cryptocurrency can be tricky because it is easy to forget or lose access to. Cryptocurrency is placed in a digital wallet, and then, a user gets a private key or password to let them access the currency. Without this key, it is impossible to prove that you own the cryptocurrency. Unfortunately, many people who bought cryptocurrency back when it was a novelty have ended up losing their passwords or forgetting about transactions. This causes a variety of complications during your divorce, including:
- The spouse who is less comfortable with technology might lose access to their cryptocurrency after assets are divided and shared.
- One spouse claims that the other does not deserve more marital assets because they will supposedly become a Bitcoin millionaire if they can just remember their password. However, the reality is that losing the password locks the funds away permanently, so they are no longer relevant in the divorce.
- Forgotten cryptocurrency can still appreciate rapidly, resulting in income tax. After the divorce, you and your ex might find that you both owe taxes for the funds.
- Regaining access to lost cryptocurrency suddenly can throw a wrench in all your previously agreed-upon asset division plans.
How to Avoid Cryptocurrency Complications in a Divorce
As you can see, there are all sorts of ways for cryptocurrency to make a divorce more complicated. Even in a best-case scenario where you and your estranged spouse still get along fine, you will need to spend more time figuring out financial matters. Making the effort to choose the right cryptocurrency division and get input from the professionals can help keep your finances in good shape. Things go a lot more smoothly when the two of you can work together for mutual benefit. However, in some divorces, a person may use all the confusion around cryptocurrency to make things more frustrating and difficult for their ex. In these cases, a talented divorce lawyer is even more important.
If you would like help managing cryptocurrency in a divorce, the Law Office of Kelly Berton Rocco is here to help. Our Hackensack team is fully up to date on all the latest cryptocurrency regulations, so we can assist you with dividing these assets fairly. We also help with a variety of other tasks, like establishing alimony or advocating on your behalf for child custody. Call us at 201-343-0078 or fill out and submit our online contact form to schedule a consultation.