Mark DiMichael, CPA, a partner at Citrin & Cooperman, is an expert in forensic accounting and valuation for cryptocurrency. He advised me that starting in 2020, the IRS requires taxpayers to report whether or not they have cryptocurrency on the standard income tax return, which appears on page 1 and is the first line item listed after the taxpayer enters their address. However, what if a spouse fails to report the cryptocurrency? Cryptocurrency is notoriously difficult to track and is becoming a significant issue in many divorce litigations. Here’s Mark’s advice to my divorcing clients on the top five ways to find digital currencies.
1. Review bank records – Although there are many ways to obtain cryptocurrency, the majority of cryptocurrency transactions occur on cryptocurrency exchanges. Individuals generally make their first purchase by transferring US dollars from a bank account or credit card to an exchange. A review of bank and credit card records can reveal transfers to well-known cryptocurrency exchanges such as Coinbase, Gemini, and Kraken or cryptocurrency payment processors such as BitPay or CoinPayments.net.
2. Look - Cryptocurrency is digital, but there are certain physical indicators of cryptocurrency use. Individuals can search the marital residence for evidence of cryptocurrency such as the following:
- Paper Wallets: pieces of paper with long strings of random letters and numbers;
- Hardware Wallets: small electronic devices with a port that can be plugged into a computer; and
- Backup seeds: strings of 12 to 25 random words written down on paper, or etched into metal.
3. Listen – Cryptocurrency enthusiasts love to talk about it or discuss it on Facebook (sometimes a little too much). Any information heard from a spouse or a spouse’s friends can be very useful to an investigation.
4. Subpoena exchanges – US based exchanges and other US based entities will respond to subpoenas. Your divorce attorney may subpoena all known cryptocurrency exchanges used by the spouse. Or, if unknown, the attorney may subpoena large US based exchanges, to discover if an account is held there.
5. Don’t procrastinate – Locating and tracing cryptocurrency is a slow, step-by-step process. Computer forensic experts are often needed to obtain digital information from a spouse’s electronic devices. Multiple rounds of subpoenas are often necessary. Speak to your divorce attorney about valuing cryptocurrency and develop a strategic plan.
Mark DiMichael, CPA, is a partner of Citrin & Cooperman. He regularly teaches CPE/CLE classes on digital assets and cryptocurrency, covering topics such as fraud, tax, accounting, investigation, and industry developments. His areas of expertise include divorce litigation and valuation of business and cryptocurrency assets, economic damages analysis, fraud investigation, cryptocurrency/digital assets, white-collar criminal defense, and business appraisals.
Citrin Cooperman is a top-25 nationally recognized full-service assurance, tax, and advisory firm with offices located throughout the United States, in addition to the United Kingdom, India, and the Cayman Islands.Mark may be reached at email@example.com, or 212-697-1000 x1369.