Cryptocurrency and divorce: key questions to consider

Interest in cryptocurrency, also known as digital currency, has recently exploded. Bitcoin perennially continues to be the largest cryptocurrency, followed by Ethereum. There are well over five thousand cryptocurrencies with new ones being formed and obscure names rising into prominence every day, most recently Dogecoin. One industry report estimates that approximately 20 million Americans may own cryptocurrency. As forensic accountants, we may be able to assist you and/or your attorney in identifying and valuing these assets as part of a divorce. Cryptocurrency and divorce – here are some things to keep in mind.

Does the other spouse hold cryptocurrency?

Divorcing couples must disclose all their assets and liabilities. However, what if there are suspicions that the other spouse is partially or wholly hiding these assets? Your attorney may be able to file a subpoena or obtain a court order to access hardware and electronic and physical records. As forensic accountants, we may be able to search for evidence including analysis of transfers and wire activity on bank and brokerage statements, transaction confirmations and discussions about cryptocurrency on emails, listings on loan applications, and inclusions of cryptocurrency gains and losses on tax returns and tax preparation work papers.

How (and when) should digital assets be valued?

Cryptocurrencies are extremely volatile assets. Double digit percentage price swings in a single day are not uncommon for Bitcoin and even more so for other start up and emerging cryptocurrencies. Typically, real time pricing data is available on exchange websites and other industry sources. However, the divorce litigation process can be lengthy and the date and time of valuation of the assets may be unknown up front. Depending on the specific digital assets involved and the terms of the proposed divorce settlement, simply looking up a spot price may be insufficient and advanced financial modeling techniques may be required to estimate value. Unlike stock exchanges, cryptocurrency transactions occur 24 hours a day, 7 days a week.

Are the digital assets safe?

Cryptocurrency keys can be stored directly on a computer (not recommended) or in a secured hardware wallet designed specifically for such purposes. Digital assets may be held via online exchange accounts. While quick and convenient to access and trade, online exchanges lack regulation and may be highly susceptible to hacking and theft. Throughout the period of the divorce proceedings, these assets must be secured and protected with physical and logical controls and the existing level of security in place may not be appropriate.

A spouse may wish to be compensated for the value of the cryptocurrency upon settlement rather than actually receiving the asset itself. Like any financial asset, the tax impacts on the potential future capital gains (or losses) must be considered.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.