Coinbase (COIN) went public recently and had the attention of the investment world. Coinbase is a financial technology company that focuses on offering its retail users the ability to buy, sell, and own crypto and digital assets like Bitcoin, Ethereum, Litecoin, Doge Coin, and other currencies on the block chain. Coinbase reported they have more than 50 million retail users.
The popularity of cryptocurrencies has skyrocketed over the last decade. You can’t watch Bloomberg or CNBC or any other financial news outlet without crypto being discussed. Significant wealth has been created for individuals owning crypto assets as well. On April 16th, 2020 Bitcoin was $7,354. On April 15th, 2021 Bitcoin was $63,214.
Some experts believe we are in the very beginning of a long bull market with crypto currencies and at some point the “crypto standard” will replace our current “gold standard”. Financial advisors are struggling with how to offer these assets to their clients as a liquid, compliance approved vehicle is not readily available from a trusted source. This is all rapidly changing. Some experts estimate by the end of 2021 crypto currencies will become common place in portfolios as large financial institutions begin offering them.
Determining the Value of Cryptocurrency
Naturally, as a Divorce Financial Advisor, I began thinking how these types of assets were going to impact divorce settlements. In addition to Coinbase, investors can buy cryptocurrencies through companies like PayPal, Cash App, Robinhood, and Blockify. These relatively new types of investment vehicles should be examined very carefully by client’s getting divorced, attorney’s negotiating a settlement, and financial experts working for clients. In addition, sometimes divorces take 6 or 9 months or even a year to finalize. With any asset as volatile as Bitcoin, you will want to make sure the marital balance sheet is updated before any financial agreement is reached. Imagine the change in value of a Bitcoin holding from my example above. If Joe and Sally are getting a divorce and filed 4/16/2020 and he owned 3 Bitcoin valued at $22,062. A year later, and now that same Bitcoin is worth $189,642.
Analyzing cryptocurrency holdings in a marital estate is going to become more and more common moving forward. It will be crucial for the client, the attorney and the financial expert to work together to examine the potential impacts of taking the crypto asset versus giving it to their soon to be ex-spouse.
Determining the tax consequences will be a major issue as well. What is the tax impact if the crypto asset is sold? Were there any crypto assets sold in the year of the divorce? There could be a huge forgotten tax bill if you are not careful! Investors must report capital gains or losses from sales of cryptocurrencies on Form 8949 and Schedule D just like buying and selling property or stock. However, according to an article in the February issue of Financial Planning, titled Crypto Creates New Hurdles for Financial Advisors This Tax Season, many firms only send out the gross proceeds of the Crypto asset sales. It is the investors responsibility to figure out their own cost basis. This can create many hurdles when determining a marital estate. This information is crucial to determine the impact of how the crypto asset should be split.