Crypto wealth allocation and tax implications for a divorce

Cryptocurrency has increasingly become a factor in divorce settlements as bitcoin, dogecoin and other types gain mainstream acceptance and values spike. Whether spouses have dabbled or invested sizable amounts of money, cryptocurrency may add challenges when the couple splits. Cryptocurrency has added a layer of complexity that couples may need a professional with cryptocurrency expertise.

Price volatility

One of the tricky aspects of splitting up cryptocurrency is nailing down the value. Digital currency worth $200,000 may drop to $100,000 or rise to $400,000 during the divorce process. Spouses may prepare by adding some type of volatility formula into the divorce contract.

Tax considerations

For example, a spouse who bought bitcoin four or five years ago may have had significant growth, subject to long-term capital gain taxes when they sell. As couples negotiate, they may need to factor in their post-divorce tax bill. Other issues may arise if one spouse failed to report cryptocurrency income to the tax authorities, a common problem before digital exchanges were sending tax forms. If the tax agency comes back with questions years later, it may impact couples who filed taxes jointly, even if one spouse wasn’t part of the original transactions. A spouse may avoid trouble by asking for an affidavit from their ex-spouse. The document may say their ex-spouse had no unreported income.

Transferring assets

After signing their divorce paperwork, couples may have a new challenge about transferring cryptocurrency from one spouse to another. Couples should hire a financial professional to handle the cryptocurrency transfer. Cryptocurrency holdings can be split the coins equally or as per the divorce contract. Once coins are transferred, the cost basis or purchase price of coins are also transferred so whenever either party decides to sell coins they both pay their respective taxes based on capital gains accumulated. Another alternative to this process would be to sell all coin holdings as per the current market rate and split the amounts as decided.