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What happens to your cryptocurrency holdings in divorce?

On Behalf of | May 5, 2023 | Divorce |

Washington is one of only nine states that operates under community property guidelines when a pair of spouses decides to dissolve their marriage in court. This means that the court will divide your assets (and liabilities) between you and your ex. For tangible assets, such as a house or vehicle, this is a fairly simple process. The value of the asset is determined, then divided. Often the net marital assets are divided in half, but many times this division is not 50/50, based on the financial circumstances of both parties. Property division in divorce can be much more complex.

For instance, what if you have cryptocurrency holdings? Determining (and splitting) the value of digital assets may not be as easy as dividing other financial assets. If you entered the crypto market in its earliest stages, you may have amassed great wealth from your investments by now. It’s understandable if you want to protect your financial interests as you and your spouse prepare to part ways.

Tracking cryptocurrency and proving ownership can be challenging in a divorce 

Washington law requires full disclosure from both spouses regarding the listing of assets and liabilities in a divorce. It’s unlawful to try to hide assets to keep your former partner from getting his or her fair share. Both parties have a fiduciary duty to make full disclosure. Cryptocurrency may be involved in a scheme to cheat a spouse, because such assets are easier to conceal than others.

If you’re trying to track down cryptocurrency in a divorce, you’ll need to find out where the “wallet” associated with the assets is located. You may need to enlist assistance from a financial forensics investigator. Bank records and tax returns might show evidence of cryptocurrency income.

How to divide cryptocurrency holdings 

If you have holdings in one or more types of cryptocurrencies, you might agree to trade a certain number of holdings for other marital assets in your divorce. Or, you and your ex might instead choose to liquidate crypto assets and split the proceeds equally.

It’s important to note that crypto transactions are often irreversible. The court cannot seize or garnish them to pay a debt, such as child support. You’ll also want to be aware that there are often fees associated with Bitcoin transfers. If you and your spouse agree to go that route to divide crypto assets in your divorce, remember to determine ahead of time which one of you will cover the fees.

Cryptocurrency transfers in a divorce may avoid taxation

U.S. tax codes may not tax cryptocurrency transfers pursuant to a divorce decree. If done properly, transfers pursuant to court order may not be taxable. If you sell your share of cryptocurrency holdings after the divorce, however, you may have to pay a significant capital gains tax. If you’re unsure about Washington divorce laws that are relevant to cryptocurrency holdings, it’s best to seek counsel before heading to court.