Dividing cryptocurrency in a divorce settlement is complicated

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

More than 20 million Americans may own cryptocurrency, industry groups estimate, and the digital currency market value rose to $2 trillion for the first time in April. 

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,” said certified financial planner Davon Barrett, lead advisor at Francis Financial in New York.

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Here’s what divorcees 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 attorneys have more digital currency knowledge and experience, with better insights on how to proceed with the settlement, he said.

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, said Johnson.

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

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

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

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

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, Barrett said.

Other issues may arise if one spouse failed to report cryptocurrency income to the IRS, a common problem before digital exchanges were sending tax forms, Johnson said. 

If the IRS 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, he said. 

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

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

While traditional investment companies know how to split up assets for a divorce, some cryptocurrency exchanges may have less experience, Johnson said.

Moreover, these exchanges may have smaller customer service teams for tackling issues.  

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

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

Once a couple hires a third party, it’s critical to protect their private keys — passwords to access and manage the digital money — or they may risk losing access to the funds.  

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