update 24 September 2021

Can One Split Their Crypto Investments During a Divorce?

Crypto popularity has been brewing like a storm. Adoption rates are increasing, with estimates placing the figure in the United States at around 20 million. Everyone seems to want a slice of the crypto pie.

But the digital asset is a young player in the investment asset world, having first appeared in 2009 under Bitcoin. As such, the regulatory framework governing cryptos isn’t universal. It is essentially a work in progress.

So a question lingering in people’s minds is what happens to cryptocurrencies during a divorce? Is it a requirement for one to split their crypto savings as a result? Read on to find out.

Crypto Requirements Across a Few Key Nations

As stated earlier, the regulatory framework is not universal; legislation varies significantly between nations. El Salvador recently adopted Bitcoin as legal tender as a case pointer and treats the crypto as it would its national currency. On the other side of the scale, China has upped its war against cryptos, recently making over 1000 crypto-related arrests and shutting down a company for conducting businesses with crypto entities.

One shouldn’t expect the two countries to have similar requirements on cryptos during a divorce. Below are the conditions in a few key nations.

In the United States

Within the US, partners should split cryptos during a divorce. Therefore, they must declared their crypto possesions. The path towards dividing the cryptos, however, poses a significant challenge to all parties. A couple may need to hire an expert with better insights on proceeding with the settlement case.

One key challenge with dividing up cryptocurrency savings is coming up with the estimated value. Cryptos are notorious for their high levels of price volatility. When splitting, parties agree on a 50-50 settlement; a party getting more of their compensation in cryptos is at a problem.

Prices may rise or fall significantly just before the settlement, calling for another renegotiation. Both sides could add a volatility formula to their divorce contract to account for such issues.

Another issue is tax bills. Long-term capital gains taxes on cryptocurrencies tend to accumulate a lot faster than in almost any other asset. If the couple filed joint tax returns before divorce, one party failing to report their crypto income to the IRS could pause another tax problem. An affidavit may be needed to exempt the ex-spouse who wasn’t owning the crypto initially from tax-evasion proceedings.

In China

For the case in China, it is a little more straightforward. The Chinese government has been keen to enforce a blanket ban on all cryptocurrencies. The only legal digital asset in the Asian nation is the Digital Yuan. Couples with cryptocurrencies must dispose of them. Also, they should acquire other accepted assets such as gold, real estate, or the digital Yuan.

The divorcing couple should tacitly agree upon the splitting of cryptos in the country. This situation opens a loophole for one hiding their crypto savings from their asset declaration during divorce proceedings.

However, the State Administration on Taxation lumps cryptos as other digital assets such as gaming receipts. People have to remit taxes to the authorities. The mark-up from the initial price value to the selling price will be the taxable income. Therefore, it computes as property transfer income.

So if an ex-spouse splits their cryptocurrency investments, one needs to beware of the tax due from the time of purchase. If their ex-partner does not disclose the initial price, they must secure an affidavit exempting them from tax evasion proceedings. Other issues such as volatility must also count.

In the European Union

The EU is a bloc of 27 nations, each with different government positions on cryptocurrencies. HOWEVER, the EU regulatory framework on cryptos has tried to pass and maintain a single regulatory framework for all nations. Its position on cryptos has been slightly less adaptive than the US one but more lenient than the Chinese or UK positions.

When divorcing, both parties must first know of the crypto asset transfer regulations in the country. Both parties must disclose all necessary details as per the regulations linked above to the authorities. Failure to do so creates the risk of seizure by the government.

Aside from that, they also need to consider the cryptocurrency price volatility and capital gains tax obligation. The recipient ex-spouse should also consider tax evasion issues that may arise from unreported crypto-asset payments. In such a case, an affidavit exempting them is essential.

In the UK

The UK’s government’s perception of cryptocurrencies lies somewhere between China’s combative nature and the US’ tolerance. Theoretically, the UK government treats cryptos as any other asset; splits them between divorcing couples.

However, the government treats cryptos as an unregulated asset. Therefore, no regulators can determine how the assets’ trading or evaluation. While people expect divorcing parties to declare them, the anonymity of cryptos makes it easier for one to omit them.

The ex-spouse will have no help from regulators in trying to establish the authenticity of such statements. UK government forensic investigators may not help much, necessitating hiring a private investigator.

One must also consider other issues such as capital tax gains. Additionally, price volatility, and tax evasion due to not reporting crypto assets play a crucial role. While cryptos are not under specific regulations in the country, they are still part of personal investments. Therefore, they are subject to tax.

Author’s Take on Crypto Splits During Divorce

Being a relatively young asset, the regulatory framework governing what should happen to cryptos during a divorce is still evolving. The framework itself is heavily dependent on government sentiments towards cryptos.

The most lenient of the listed ones in the US, the way forward, is more accessible. The most combative is China, which opens many loopholes for one to avoid exposing their assets. The EU and UK lie in between, with the EU being the more supportive of the two and clearer steps.

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For anyone, it is wise to familiarize themselves with the regulations of any country they’re in regarding divorce in cryptos. The covered countries or groups of nations above show what to expect depending on government sentiments towards cryptos.