Dividing crypto in a divorce: the US tax rules on transfers, cost basis and selling

Crypto can be divided in a divorce like any other asset, but it brings a tax question that’s easy to miss. Moving coins from one spouse to the other usually costs nothing in tax. But who gets which coins can make a big difference later, because the receiving spouse takes on the original cost basis.

This guide explains the federal tax rules from IRS Publication 504 as they apply to crypto: tax-free transfers, carry-over basis, sales, gift tax and record-keeping. It doesn’t cover state property law or how assets are divided, which are matters for your lawyer.

Crypto is property

The IRS treats digital assets as property, not currency. That matters because the divorce rules in Publication 504 apply to “all property whether real or personal, tangible or intangible”. For how crypto is taxed generally, see crypto tax in the US.

Transfers between spouses: generally no gain or loss

Publication 504 says that, generally, no gain or loss is recognized when you transfer property to:

• your spouse; or
• your former spouse, but only if the transfer is incident to your divorce.

This applies even if the transfer is in exchange for cash, the release of marital rights, the assumption of liabilities or other consideration. So moving bitcoin from your wallet to your former spouse’s wallet as part of the settlement is generally not a taxable sale.

When a transfer is “incident to divorce”

According to the IRS, a transfer is incident to divorce if it:

• happens within 1 year after the marriage ends; or
• is related to the end of the marriage, which generally means it’s made under the original or modified divorce or separation instrument and happens within 6 years after the marriage ends.

Later transfers are presumed unrelated, unless you can show they carried out the division of property owned when the marriage ended, for example because legal or business factors delayed them.

Exceptions

The rule doesn’t apply if your spouse or former spouse is a nonresident alien, to certain transfers in trust, and to certain stock redemptions.

The catch: carry-over basis

The spouse who receives the property is treated as having acquired it by gift for income tax purposes, so its value isn’t taxable to them when they receive it. But their basis is the same as the transferring spouse’s adjusted basis. The IRS says this applies whether that basis is lower than, equal to or higher than the value at the time of the transfer.

An example. A couple splits $100,000 of crypto equally:

On paper, each has $50,000. But if both sell, Spouse A has a $40,000 gain to report and Spouse B only $5,000. When negotiating, it can make sense to compare holdings after tax, not just at today’s value.

Selling to split the cash

Some couples sell the crypto and divide the proceeds instead. That’s a sale, and the transfer rules above don’t apply to it. Publication 504 says that if you sell property you and your spouse own jointly, you each report your share of the gain or loss, determined by your state law on property ownership.

Records you must hand over

The IRS says that when you transfer property to a spouse or former spouse, you must give them enough records to determine the adjusted basis and holding period on the date of the transfer. For crypto, that means the purchase dates, amounts paid and fees for the coins transferred, which can be hard to rebuild if they moved between exchanges and wallets.

Brokers’ Form 1099-DA can help with sales made through a broker. See Form 1099-DA explained and how to use a block explorer.

Gift tax

Publication 504 says a transfer to a spouse who is a US citizen generally isn’t subject to federal gift tax, because of the unlimited marital deduction. A transfer to a former spouse may be, unless an exception applies, including transfers:

• made under a divorce decree;
• made under a written agreement, where you divorce within a specified period;
• made in settlement of marital support rights, up to their value;
• covered by the annual exclusion.

If a transfer doesn’t qualify, you must report it on a gift tax return. See crypto gifts and donations.

Costs you can’t deduct

The IRS says you can’t deduct legal fees and court costs for getting a divorce, or legal fees for tax advice in connection with it.

A checklist

1. List every holding, wallet and exchange account, with the cost basis of each lot.
2. Compare holdings after tax, using each lot’s basis.
3. Transfer, don’t sell, if the aim is to divide crypto without triggering tax, and keep within the “incident to divorce” time limits.
4. Hand over basis and holding-period records with any coins you transfer.
5. Check the exceptions, such as a nonresident alien spouse, with a tax professional.