Understanding Cryptocurrency During Divorce

Navigating a divorce can be overwhelming, especially when it comes to understanding and managing finances. Among the many financial aspects that need to be addressed, one area that might seem particularly daunting is cryptocurrency. Whether you’ve heard about it in the news or you are trying to understand its impact on your financial future, having a basic understanding of what cryptocurrency is, some of the known benefits and drawbacks, and how it factors into your divorce proceedings is essential so you can make informed decisions when discussing with your divorce attorney and financial advisor.

What is cryptocurrency?

Cryptocurrency (“Crypto”) is a type of digital currency that exists solely online and can be used as payment or a nontraditional investment. Most individuals obtain cryptocurrency by purchasing it from an exchange. The buyer has a digital wallet which stores private keys that allow them to access their cryptocurrencies. There are several types of wallets with varying levels of security and privacy. Cryptocurrency transactions are secured using Blockchain technology which links data blocks chronologically to form a digital ledger. Unlike traditional currency, there is no third party such as a central government or bank regulating cryptocurrency which allows for 24/7 trading and greater privacy. There are thousands of different types of cryptocurrencies with Bitcoin and Ethereum being examples of the most well-know and widely used.

Where can you buy it?

While it is possible to buy crypto directly from other users, the most common way to acquire it is via a centralized exchange like Coinbase. These centralized platforms offer a more user-friendly experience with security features and customer support, making them a good option for beginners. You can also purchase crypto on a decentralized exchange, which allows users to trade without an intermediary. This offers greater privacy and control; however, decentralized exchanges can be hard to find and may not be appropriate for those new to cryptocurrency.

More recently, you can gain exposure to cryptocurrency through spot exchange traded funds (ETFs). These Spot ETFs track the underlying currency and allow investors to gain exposure in a traditional brokerage account without needing to open an account on an exchange and take on the associated complexity and security risk.

Why consider cryptocurrency in your financial plan? What are the risks?

Cryptocurrency is increasingly seen as a potential investment opportunity due to its ability to provide diversification from traditional investments such as stocks and bonds. As an emerging asset class, it has experienced rapid growth and innovation, making it an attractive option for those willing to take on more risk.

Of course, the potential for high returns comes with significant risk. Cryptocurrency is relatively new, so there is limited historical data to rely on. It is known for its high volatility, meaning it is possible to see large swings in the value of your assets over a short period of time. While it has been gaining more traction, it has not seen widespread adoption yet, and its future is still uncertain from a regulatory perspective.

Depending on the method of purchase, it is possible for your assets to be lost or stolen if proper security measures are not taken. Given the rise in value of crypto, it has become a target for cyber criminals. Without the protections provided by traditional financial institutions, the responsibility for safeguarding digital assets falls solely on the owner.

Additionally, the anonymous nature of cryptocurrency comes with additional challenges if not properly addressed in an estate plan. Depending on the type of storage of the currency, if the owner of a digital currency dies or becomes incapacitated without having shared the location of their wallet and keys, then it may be lost forever. A comprehensive estate plan should address where digital assets are located, how they are owned and how heirs or fiduciaries can access the cryptocurrency. With laws around estate planning and crypto continually developing, it’s important to consult attorneys and financial advisors familiar in the space.

Unique Challenges in Divorce

In a divorce settlement, cryptocurrency may be treated like any other marital asset. If it was acquired by a spouse during the marriage, it can be considered marital property and be subject to division. Below are several of the key considerations when it comes to cryptocurrency in divorce.

Locating Cryptocurrency

Unlike traditional financial assets, cryptocurrency is not tied to a bank or financial institution making it harder to track. If a spouse is not forthcoming, finding their crypto assets can be difficult or it could be used as a place to hide assets that might otherwise be subject to division.

Moreover, accessing the cryptocurrency requires knowledge of the private key. As mentioned above, there are various types of wallets and it is possible to keep a “cold” wallet, meaning your key is offline for added security. Because of these challenges, it is important to disclose the ownership of crypto to your legal team, so proper measures can be taken to ensure a fair decision is reached. If you think your spouse might be hiding crypto, you can consider hiring a forensic accountant with cryptocurrency experience to help trace the asset. That process typically begins with identifying money flowing out of conventional accounts to unknown or unfamiliar destinations. Other techniques involve obtaining digital images of the contents of phones and computers used by the other spouse to search for evidence of crypto transactions.

Valuing Cryptocurrency

After the asset has been located, it can be tough to value. The price swings are often much more severe than a publicly traded security which results in an ever-changing value on the marital balance sheet. It’s important to work with professionals knowledgeable in valuing cryptocurrencies, including an experienced attorney. The attorney, along with the forensic accountant can review the history of the crypto, including when it was acquired and its pricing over time to help you determine the value of the crypto at the time of divorce or distribution.

Dividing Cryptocurrency in Divorce

Once you and your team determine an appropriate valuation for the cryptocurrency, you’ll need to decide how you will divide the asset. There is not one correct way.

Divide ownership: Some may choose to divide the crypto and give a portion to each spouse. Each spouse would need to have their own wallet and make a plan for the owner to transfer the agreed upon portion to the spouse’s wallet. Keep in mind this method requires both parties to be comfortable with the technology involved.

Liquidate: Another approach is to sell the entire asset, or one spouse’s share and distribute the proceeds. It is important to consult your legal team and an accountant who is familiar with taxation of cryptocurrencies before making any decisions and implementing. The gain on cryptocurrency is subject to taxes, similar to how gains on traditional investments are taxable, so be sure to factor in these tax implications before making any transactions.

Exchange: Other times, the spouse that owned the crypto keeps the digital asset and supplements with another marital asset for an equitable agreement. This gives the crypto owning spouse the opportunity to continue investing in cryptocurrency and lets the non-owner spouse avoid the complexities of owning crypto if they do not want it.

Is Cryptocurrency right for me?

If you are considering adding cryptocurrency to your portfolio, it is important to do your own research or consult with an advisor. There are thousands of currencies available, and you want to make sure your portfolio and plan can sustain the risk, and the asset you are purchasing is appropriate for your situation.

How will you navigate the potential gains and pitfalls of cryptocurrency during and after your divorce?

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