With the recent popularization of virtual currencies over the past couple of decades – you may be wondering if and how “cryptocurrency” comes into play when with family law matters. In the last fifteen years in particular, the popularized cryptocurrency known as “Bitcoin” with a ledger dating back to 2009 has become only one of over 9,000 different forms of cryptocurrency as of January 2022. Cryptocurrency popularity has grown exponentially, in part due to its particular nature not being tied to any government-issued currency, such as the U.S. dollar.
Acknowledging Virtual Currency
Similar to traditional forms of income , the Internal Revenue Service (IRS) depends on citizens to voluntarily and accurately report their income earned from “mining” cryptocurrency or otherwise monetary exchanges in the cryptocurrency market. More specifically, at the top of Form 1040, taxpayers are asked “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” The IRS has numerous resources on what to include when filing your taxes for funds received in exchange for cryptocurrency exchanges.
States such as Massachusetts and North Carolina have specifically passed legislation that provide legal recognition of cryptocurrency as an investment or asset. As such, cryptocurrency can generate income because it can be exchanged for government-issued currency. As such, cryptocurrency becomes a notable consideration in divorce and financial matters in family law matters.
Valuation Issues with Cryptocurrency
Cryptocurrency valuations are difficult to assess due to its nature of highly fluctuating prices. This makes it more difficult to fairly divide the assets or property following a separation. A “fair distribution” of assets and debts inclusive of cryptocurrency today may look very different tomorrow, or even in the next hour. To better prepare for the uncertainty of the crypto market, spouses may wish to add some form of a volatility formula within their settlement documents.
Splitting assets and marital property can be a touchy subject in general. Adding in the uncertainty that is involved with cryptocurrency can make the situation even more frustrating. The older forms of virtual currency such as Bitcoin are easier to track since they have been around longer; but the newer forms are somewhat more difficult. These transactions are even more headache-inducing when they involve foreign cryptocurrency exchanges. Finally, the actual transfer of the currency from one party to another party could cause a significant decrease in value of the asset.
What if They are Hiding Cryptocurrency?
If you are thinking about filing for property distribution incident to divorce and suspect that they other party may be hiding cryptocurrency, there are multiple precautions you can take:
- Plan Ahead: If possible, think about any cryptocurrency issues that may arise in the future should you separate from your significant other. This may include collecting regular reports of cryptocurrency markets and exchanges. Journal any discussions about the different forms of cryptocurrency in which your significant other may be investing.
- Check Joint Accounts: It may be a telltale sign if there is suspicious money missing from shared accounts or even large deposits coming from seemingly out of nowhere. However, this does not necessarily mean that they are involved in cryptocurrency, there are numerous things that suspicious transactions could be reflecting.
- Notify Your Attorney: Openly discuss the possibility of cryptocurrency being an issue in your family law matters with your attorney, especially if you have receipts or evidence that may indicate so.
The world that we live in requires family law to evolve in a manner to serve families in the most efficient, effective, and equitable way possible.
If you have cryptocurrency issues in your family law matter, our Modern Legal Team is here to help.
Written by: Theresa E. Viera
