The Basics of Cryptocurrency
If you are going through a divorce in Kansas or Missouri and you or your spouse own cryptocurrency or other digital assets, it is important that you work with an experienced family law attorney who has experience in valuing and dividing these unique assets. Cryptocurrency is a form of money and can also be used as a form of money/financial exchange. It is similar to an electronic payment system, ie. Cryptocurrency has to be converted into dollars if you want actual dollars to spend, but if used in locations where cyrptocurrency is accepted, it can be exchanged as a mechanism to pay for goods, services and other things. Cryptocurrency “coins” sometimes abbreviated as “crypto” are generally held in an online or digital wallet and are often held through an online service or program, kept on a personal hard drive, a portable hard drive or in some other storage mechanism. The wallet allows the owner or holder of the wallet to keep and maintain their crypto coins as an investment or use them through their wallet to purchase goods and services.
How is Cryptocurrency Taxed?
At the present time, cryptocurrency holdings or investments are classified as property and therefore, taxed at capital gains rates. Therefore, when a gain or loss is realized as the result of a sale, transfer or payment for goods or services or exchanged for another type of crypto, potentially a taxable event is realized. One of the difficulties with cryptocurrency however, is that because the monies realized are not disclosed to the government through a 1099 or other IRS form, some investors elect to not voluntarily disclose and pay taxes. IRS tax rules require that gains and losses on cryptocurrency be reported even if the gains or losses are not material. Essentially, if the value of your cryptocurrency is greater at the time of the purchase it is used for or at the time you transfer or cash it in, a capital gain is required to be disclosed. Similarly, if at the time of the purchase or transfer, the value has decreased, it incurs a capital loss. In years past, many individuals have tried to avoid taxation through the use of cryptocurrency, but the IRS is now trying to crack down on this. Specifically, tax filers are asked, on the front page of their 1040 return if they “received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency.” For digital wallet users, there is a transaction ledger that can be used to determine if capital gains or losses are present.
The Basics of How Cryptocurrency Affects Your Divorce Case
Cryptocurrency is generally classified as an asset, not as an income stream or source, which should be listed as an asset on your statement of property and duly disclosed in the divorce case process. For most types of digital wallets, a current value for the holdings is listed when you log into your account. The values are generally listed based on the specific cryptocurrency and shows a conversation rate to US dollars. Values do fluctuate on an almost daily basis and can frequently vary wildly.
How is the Marital Portion of Cryptocurrency Determined in Divorce?
While property laws can vary state to state, both Kansas and Missouri have the goal of fairly and equitably dividing marital property. Equitably generally means equally, but there are circumstances that are the exception to an equal division. How should cryptocurrency assets be divided in a divorce? Essentially, there are three primary options: transfer the crypto to equal or percentage portions to the other party (i.e. that party creates his or her own digital wallet to hold transferred assets, the crypto is cashed out and divided or the total value of the crypto is determined and offset against the values of other marital assets such as retirement assets, real estate, and bank accounts. If you elect to transfer assets, it is important that the party receiving the transferred assets is comfortable with maintaining and managing those assets, as well as the volatility that comes with possession such assets. It is also important that the fees for transfer be determined/addressed and that records from the previous wallet be provided/maintained for future tax implications. Many crypto wallets are unable to account for a transfer incident to divorce and believe that it is a “disposition” of the assets so both spouses having documentation of what occurred and whether it was based on a settlement agreement or divorce order will be helpful for documentation purposes. The IRS code Section 1041 views a transfer of property between spouses as a gift and not a taxable event. If the spouses intend something else, they will need to state/address that specifically in their settlement agreement or divorce decree.
How is a cash out addressed in divorce cases?
If one party does not want to deal with the volatility of cryptocurrency holdings, there are two options: 1) one spouses share of the asset is sold and the spouse receives the cash or 2) the spouse’s share of the crypto assets are value and then one spouse keeps all of the crypto holdings and the other spouse receives assets in kind. If crypto is sent to a spouse and they then cash it out, the capital gains are recorded under that spouse’s name as they are the one selling and redeeming the asset. On the other hand if the spouse possessing the crypto assets cashes them out, then that spouse is responsible for capital gains.
Is valuing the offset an option to address cryptocurrency?
Of course, the inherent issues with this include on what day the crypto assets should be valued. There are often wide fluctuations in the market value and often valuing crypto assets even days or weeks prior to a divorce hearing can result in a significantly different value than the value of the asset the day o the divorce hearing. Some parties choose to use a 52-week average of the value to attempt to minimize for outlier market gains or losses.In summary, if you have a divorce involving complicated assets including cryptocurrency or other digital assets, please call Pingel Family Law today to discuss your case and situation at (816) 208-8130. Allow us to use our experience, knowledge and expertise to help ensure that your assets are adequately valued and fairly divided.