Trying to come to terms with a fair distribution of assets in a high net worth divorce is without a doubt one of the most challenging aspects of a marital split — not only for the spouses, but for the professionals helping them through it. And when one of the parties does not fully disclose all of their assets, the situation becomes significantly more difficult to navigate.
In my recent professional experience, it has been necessary to involve forensic accountants in order to resolve several issues. In one instance, a client did not become suspicious that money was missing until they noticed glaring disparities between their family's high income and poor assets — a classic red flag indicative of financial infidelity — which was discovered by an investigator. However, hiring a forensic accountant does not always make economic sense, especially if the amount at stake does not significantly impact the overall financial situation.
Given the legal ramifications of engaging in financial fraud during divorce proceedings, spouses do not frequently participate in such behavior. But when they do, using bitcoin or one of the other popular cryptocurrencies can be an ideal way to conceal assets.
That’s because the digital or virtual currencies are protected by encryption and exist, by virtue of their decentralized structure, independently of governments and other central authorities. They are rarely used for everyday transactions, but as a result of their soaring value, have become increasingly popular as trading instruments.
Bitcoin, for example, which continues to be the most extensively traded and covered cryptocurrency in the world, is a highly liquid asset class and may be moved swiftly, easily and traded in large quantities. In a matter of minutes, millions of dollars can be sold, and, in the hands of those seeking to evade the law, laundered or otherwise hidden.
Game afoot
In high net worth divorces, issues can arise when one spouse is actively participating in the cryptocurrency market while the other has minimal comprehension of the technically sophisticated product. Before attempting to divide any assets, it is necessary to determine whether or not one spouse is, in fact, in possession of crypto assets. Following confirmation, the next stage is to determine where the assets are stored, whether in private wallets or on cryptocurrency exchanges, and which exchanges, if any, they are stored on. Determining which cryptocurrency assets the spouse holds is also necessary.
None of these actions are simple. Although competent experts can track cryptocurrency to some extent, it requires specialized tools and even then is difficult and time consuming to the extent it is feasible at all. Wallet addresses (which are similar to accounts) do not contain any information that can be used to identify the owner or link the wallet to a specific person or group. While earlier cryptocurrencies such as bitcoin and ethereum may still be possible to track down, newer cryptocurrencies, like monero, dash, zcash, PIVX, verge, horizen and grin, for example, may be almost impossible for experts to uncover. And there may be additional difficulties to overcome when working with overseas cryptocurrency exchanges.
At this point, a conventional investigative starting point would be to subpoena relevant cryptocurrency exchanges for information on an individual's trading, deposit and withdrawal history. This is generally a smart method because individuals are required to go through KYC (Know Your Customer) before doing business on an exchange, and the exchanges preserve records of such transactions. It would also likely offer some trading, deposit and withdrawal history of the spouse’s activity.
After bitcoin funds have been discovered, asset recovery or seizure attempts might be made. The seizure of cryptocurrencies can range from being incredibly simple to being entirely difficult, depending on the circumstances. A person's portfolio of crypto assets cannot be collected from any institution or by any court order because cryptocurrency is a pseudonymous asset. The last resort would be to initiate a criminal investigation although in most situations, the possession of specific wallets will not be established beyond a reasonable doubt.
Enter the advisor
Throughout this whole process of uncovering crypto assets and proceeding to divide them, legal and financial advisors will play a crucial role. They will not only be able to steer the client to the best course of action but can provide the right connections to necessary experts. Advisors may also examine cryptocurrency transactions, tax documents and sworn depositions from spouses in order to give clients a better understanding of their cryptocurrency position.
Of all the scenarios that can be used to identify and divide cryptocurrency, the simplest and least expensive for all parties concerned is to convince the crypto-holding spouse to admit to their holdings and negotiate a settlement.
A judge may impose forfeiture or freezing of other assets if the bitcoin assets cannot be reclaimed in this way. Hopefully, once a professional investigation produces substantial, actionable proof, the spouse in question will recognize the potential implications of non-compliance and will most likely feel inclined to settle promptly.
Dividing crypto holdings in a divorce can be — you guessed it — complicated. Given that most popular cryptocurrencies experience high volatility, both parties' legal and financial experts may agree that the worth of the crypto assets should be reevaluated before asset partition. A dramatic drop or rise in crypto value before a divorce is finalized could lead to inequity.
Crypto and taxes
Of course, cryptocurrency can be taxed. Some crypto exchanges are well documented and reported to the IRS, but others may not be. Other complications may develop if one spouse fails to declare bitcoin income to the IRS. This was a common problem prior to digital exchanges issuing tax forms to customers. If the IRS comes back with inquiries years later, it might have an impact on couples who filed joint tax returns, even if one of the spouses was not involved in the original transactions.
Suppose, for instance, that a married couple has lived together during a particular tax year prior to separation. In that case, any transfer of assets (including crypto assets) that is made between them before the end of that tax year is treated as taking place at no gain/no loss, as would be the case if they were still married. The main area of contention will be the tax treatment of the assets transferred.
Transfers occurring on or after the tax year of separation but before the date of the decree absolute/final order are treated as connected parties for CGT (capital gains tax) purposes until the date of the decree absolute/ final order. This means that any transfer of crypto assets will be deemed to have occurred at market value, regardless of the price paid. Because the crypto assets’ value has increased, CGT will be due by the person transferring the crypto assets, subject to any applicable yearly exemption, relief from tax, or losses.
