By Jonathan Fields, Esq.
Bitcoins and other cryptocurrency (Ethereum, Litecoin, Ripple, etc.) are becoming increasingly popular and, more and more, at Fields and Dennis, we are seeing them with our divorcing clients and their spouses. Here is some information that every divorcing client should know about cryptocurrency and divorce.
Do I have to disclose my Bitcoins?
Yes. In a divorce you have a duty to disclose all of your assets on a Rule 401 Financial Statement and in responses to discovery. Bitcoin, and other cryptocurrencies are assets that need to be disclosed. If you are paid in Bitcoin or other cryptocurrency, then you have to disclose this as well which may include reporting it as income on your financial statement.
Are Bitcoins part of the marital estate in divorce?
Yes, bitcoins and other cryptocurrency assets will be treated in the same way as any other investment. No matter whose name they are in, they are part of the marital estate and will be divisible just like any other asset.
What value do Bitcoins have in divorce?
Some cryptocurrencies, like Bitcoin, have an identifiable exchange rate with traditional currencies like USD but others don’t. So, those cryptocurrencies can be valued in the same way as a publicly traded stock is valued. As to cryptocurrencies that do not have an identifiable exchange rate, the attorneys at Fields and Dennis can assist in locating a financial expert who can assist in this valuation.
How does the IRS treat Bitcoins?
In 2014, the IRS issued a notice declaring that cryptocurrencies are property, not currencies like dollars or Euros. Often they are investment property akin to stock shares or real estate. So if an investor sells a cryptocurrency after holding it longer than a year, then the profits are typically long-term capital gains. The tax rate is 0% (on low incomes), 15%, or 20%. In addition, there might be a 3.8% surtax in some cases, depending on the owner’s total income. The Tax Cuts and Jobs Act did not change this. This levy takes effect at $250,000 of adjusted gross income for most married couples and $200,000 for most single filers.
Furthermore, using cryptocurrency to buy something is considered a sale by the buyer, even if the recipient accepts the cryptocurrency. Recipients of these payments often have taxable income as well. If a worker is paid in bitcoin, payroll or self-employment taxes could also be due.
It is easier to hide money in a cryptocurrency?
Transactions in a cryptocurrency which link to traditional currencies are traceable through the traditional currency bank account statements, or blockchain. Cryptocurrency transactions themselves are public but the users remain anonymous and cannot be traced without access to the currency holder’s ‘wallet.’ As there is no third party institution, like a bank, who can be relied upon to comply with orders for disclosure if needs be, there is no way to force disclosure of anonymous transactions short of hacking the user’s wallet.
However, hiding assets and lying to a court can trigger very serious consequences if it is later discovered.