Cryptocurrency and Divorce: New Challenges for Forensic Accountants

Cryptocurrency and Divorce:  New Challenges for Forensic Accountants

The New Offshore Account:

Like any new technology, cryptocurrency has potential to be truly disruptive in the world economy, to revolutionize how we pay for things and how we store money.  With any new tech breakthrough, positive things can come out of it.  On the flip side, new technologies can also be used for illicit purposes.  Crypto, it seems, can be a great tool to hide assets.

Fraud investigators and divorce attorneys around the world are seeing assets being converted to Bitcoin and other cryptos in order to defraud another party.  The biggest challenge to forensic accountants working in this area is that these new currencies are truly decentralized, not controlled by any governmental authority.  Many crypto accounts reside on an exchange, such as Gemini or Coinbase.  However, a large share is stored only in a “Bitcoin wallet.”  The wallet is a digital in nature and exists only on the blockchain.  Thus, it’s very hard to trace.  And to attach.

 True Story: 

According to the British law firm, Royds Withy King, they are involved in three cases where the divorcing parties are battling over substantial holdings in Bitcoin and other cryptos.  The largest involves purchases of Bitcoin that grew from £80,000 to over £600,000 ($840,000).  The process of settling on a valuation date and amount has been hotly contested by the parties.  In addition, this couple is facing a hefty capital gains tax when the assets are sold.  The law firm warns that tracing down these cryptocurrencies has been time-consuming and expensive.

Three challenges for the forensic professional:

Finding it. Bitcoin can be held in a “Bitcoin wallet” that doesn’t involve a broker or exchange.  Since the holder need not involve any third-party at all to own crypto, investigators need to uncover transactions through examining bank and credit card transactions, emails, web histories, phone apps and text messages.  Signed affidavits of asset holdings cannot be completely relied upon.

Valuing it. Cryptocurrencies have been around for ten years, and prices have been volatile, to say the least.  On one day in December of 2017, the price of Bitcoin swung between $1,022 and $1,325, a range of more than thirty percent.  In addition, cryptocurrencies trade 24 hours a day, so there is no “closing price” each day.  Specific dates, times, and exchanges must be defined in order to settle on a useful valuation.  The date of marriage, date of separation and date of final divorce can all be critical in the division of assets.

Tax implications. Cryptocurrencies are treated as capital assets by the US Tax Code and by most other nations.  Thus, when blocks of the currency are sold, capital gains and losses may apply.  As with the case described above, the tax implications could be huge.  This is an important factor to consider when the division of assets includes these alternative currencies.

Bitcoin and other cryptocurrencies are becoming a much larger factor in fraud investigations, divorce cases and income tax matters.  Forensic and tax accountants who are well versed in cryptocurrencies will have a better understanding of the transactions and their tax implications.


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