February 4, 2021Author: Grant Moher, Esq.
February 4, 2021Author: Grant Moher, Esq.
Over the past week, GameStop (NYSE: GME) and other “meme stocks” (e.g., AMC and Nokia) have dominated headlines as hordes of retail traders attempted to squeeze hedge funds and other high profile short sellers, creating a highly volatile market. Within a matter of weeks, shares of $GME rose from approximately $20 to nearly $500 per share before almost immediately crashing back down to less than $100 per share. Fueled by easier and cheaper methods of investing with apps like Robinhood and TD Ameritrade, along with free trades becoming ubiquitous, nearly everyone has a friend or family member that got in on the action. Naturally, some people earned a lot of money in a short period of time while others lost just as much.
As a family law attorney, I expect to receive a lot of questions from clients as to who gets the “winnings” or, unfortunately, what to do about the losses in asset division and other matters of divorce. The following is a primer as to how investment gains and losses are generally treated under Virginia law:
Overview
In a Virginia divorce, investment accounts (including all stocks and other forms of investments held within the account) are assets subject to division if they are deemed to be marital property under Virginia Code §20-107.3. Irrespective of which spouse is the account holder, an account is considered marital property if it was acquired or contributed to during the marriage (with limited exceptions). As with all other marital assets, they are subject to “equitable distribution,” which is to say that they will be divided “fairly and equitably” after considering the factors listed in Virginia Code §20-107.3(E). Booth v. Booth, 7 Va. App. 22, 27-28 (1988).
If an investment account is held in the name of only one of the parties, the statute provides for a “monetary award” that may be payable to the other party in lieu of dividing the account.
How Should the Investments Be Divided?
Generally, passive appreciation from investments is divided in the same percentages as the rest of the account. For example, if an investment account is to be divided equally, then any investment gains would be divided equally as well. This is true even if those investment gains occurred after the parties’ separation because passive appreciation did not necessarily require any additional contributions by either party to earn that additional money.
However, Virginia Code §20-107.3(E)(2) demands consideration of, “the contributions, monetary and nonmonetary, of each party in the acquisition and care and maintenance of such marital property of the parties.” Although every situation is unique, the amount of money earned through active investing post-separation should be considered.
For example, let us imagine that Spouse A had $1 Million in an investment account as of the date of the parties’ last separation and the entire account was marital at that point in time. In January 2021, Spouse A actively traded on the account and earned another $1M from the purchase and sale of $GME. Although Spouse A utilized marital funds to invest in the market, it is at least worth considering the “contributions…in the acquisition and care and maintenance” of such marital property in awarding a greater percentage of the gains to Spouse A. This could potentially result in Spouse A receiving more than 50 percent of the assets from the account.
What About Investment Losses?
Once again, generally, passive losses from investments will not affect the division of an asset. However, let us now imagine that Spouse A had the same $1M in an investment account as of the date of the parties’ last separation, but that Spouse A then loses $500K from the purchase and sale of $GME.
Under the same statute, it could be argued that Spouse A made a “negative” monetary contribution to the acquisition and care and maintenance of marital assets. Spouse A was in control of the assets and took tremendous risk with Spouse B’s share of the funds. As a result, an equitable division of assets may result in Spouse B receiving a greater percentage of the remaining assets.
Further, it could be argued that marital assets were “wasted” or “dissipated” as a result of the risky investments. In considering such an argument, “once the aggrieved spouse shows that marital funds were either withdrawn or used after the breakdown, the burden rests with the party charged with dissipation to prove that the money was spent for a proper purpose.” Clements v. Clements, 10 Va. App. 580 (1990). Gambling and speculative stock trades, in anticipation of divorce or after the date of the parties’ separation, are oft-cited examples of marital waste.
Who Pays the Taxes?
At the end of each year, financial institutions issue a Form 1099, which states the gains or losses incurred throughout the course of a year. All investment income is then claimed on the individual’s tax return for that year. The financial institution will not know whether the account holder is married or getting divorced and so if the parties are to file taxes separately, then only the account holder will be liable for any taxes owed.
“Meme stock” activity saw a lot of people buying and selling their investments in the same month. Any stocks held for less than one year result in “short-term” capital gains and losses, which are taxed at the same rate as ordinary income. For high-earners, the tax consequences for short-term capital gains will be substantial.
Once again, Virginia Code §20-107.3(E) provides that “tax consequences to each party” is a factor to be considered in the division of marital assets. This is to say that if Spouse A is required to pay a monetary award for Spouse B’s share of the investments, capital gains taxes should be calculated into the award because Spouse A will be left with the entire tax liability.
Conversely, capital losses will have been accrued in the scenario where Spouse A lost $500K from the purchase and sale of stock. Capital losses may be quite valuable because they are used to offset gains from the sale of other assets or, if there is a net loss that year, deductible against ordinary income up to $3,000 per year. See I.R.C. §1211
For example, let’s consider that Spouse A lost $500K from the purchase and sale of $GME but the parties also have $100K in capital gains from the sale of investments in a joint brokerage account. During that year, the capital losses can be used to offset the $100K in capital gains so that no taxes are paid on the investment income from the joint account. Spouse A will also have $400K in “capital loss carryover,” which can be used to offset gains in future tax years.
Capital loss carryover, especially in a situation described above, is a significant asset that must be considered when dividing assets in a divorce. See Attiliis v. Attiliis, 2009 Va. App. LEXIS 261 (2009). If the capital loss carryover is not considered, Spouse A will have $400K in losses to offset future gains, which has the potential to be worth well over $100K in future tax savings if Spouse A is a high-income earner.
Conclusion
If you or a spouse have engaged in volatile stock trades, it is important to consider the consequences this may have in the division of the assets used for trading – whether that be tax implications for capital gains or how to consider the value of capital losses.
If you have questions pertaining to your Virginia family law issues, it is recommended that you obtain legal and financial advice from professionals prior to and throughout the divorce process. Curran Moher Weis has experienced family law attorneys who are skilled in financial matters and can work with your financial advisors to plan for your best course of action.
You can request a consultation here on our website or by calling us at (571) 328-5020.
All investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
The information contained within this article is provided for informational purposes only and should not be used as a substitute for obtaining accounting, tax, or other guidance from a licensed tax professional.
