The Growing Issue of Cryptocurrency During a Divorce
More than 20 million Americans own cryptocurrency, and that number is growing every day. People are attracted to this type of investment because of the potential to make large gains quickly, often much faster than putting your money into blue-chip stocks, for example. Most of us have heard the stories about how just a couple of thousand dollars invested in bitcoin a decade ago would make you a millionaire today.
Cryptocurrencies are still performing pretty well, and many people see this investment as a modern-day gold rush. Others, however, have warned that gains like these are unsustainable, and a collapse is coming. Whatever side of the debate you are on, one thing is clear; cryptocurrency appears to be here to stay.
Cryptocurrency has some characteristics that make it especially challenging to deal with during a divorce. First of all, the value of this investment tends to fluctuate wildly from day to day and week to week. Secondly, individuals can own cryptocurrency discreetly, which can present additional complications, especially if the spouse that owns it is uncooperative.
What is Cryptocurrency?
For those who are not familiar with cryptocurrency or have heard about it but do not really know what it is, you are not alone. Most of the people who are invested in it don’t fully understand how it all works either. Here is a basic overview to help you understand it better.
Cryptocurrency is a digital currency that uses encryption algorithms that allow it to function as both a currency and a digital accounting system. A cryptocurrency account is accessed through a digital wallet, which could be software that is cloud-based, or it could be stored locally on a computer, mobile device, or even a flash drive. The wallet is accessed with encryption keys that confirm the identity of the owner.
Cryptocurrencies can function as an alternative form of payment. For example, some merchants accept bitcoin, dogecoin, or other digital currencies for their products or services, and this form of payment is continuing to gain more acceptance. It is also fairly easy for individuals to purchase cryptocurrency if they have a bank account or some other method of digital payment.
The Challenges of Dealing with Cryptocurrency During a Divorce
Because of the complex nature of cryptocurrency, it can present a number of difficulties when a couple decides to get a divorce. Here are some examples:
As we talked about earlier, the value of cryptocurrency investments can fluctuate significantly during a short period of time. The reason for this is that cryptocurrencies are not tied to any banks, and the currency is largely unregulated.
Because of its volatility, the value of the cryptocurrency that is to be divided during a divorce can be hard to nail down. For example, a spouse may hold $100,000 in digital currency at the start of the divorce proceedings, but by the time the marriage dissolution is finalized, the value may have risen to $200,000, or it may have dropped to $50,000.
There are a couple of ways for divorcing couples to deal with the volatile nature of cryptocurrency:
- Liquidate the digital currency at the start of the proceeding, which establishes a set value.
- Divide the asset in its current form (cryptocurrency) and adjust its value upward or downward (as appropriate) for the final settlement.
If the couple chooses to divide the asset while still in the form of digital currency and distribute it as agreed upon in the settlement, transferring ownership of the currency may not be as simple as it would be with more traditional assets. Many of the cryptocurrency exchanges are fairly new, and they are not always familiar with the correct process for transferring these assets while protecting the private keys/passwords of the current owner. Couples should enlist the help of a financial professional with expertise in this area to ensure a smooth and safe asset transfer.
Assets such as cryptocurrency that have the potential for significant gains in value are likely to incur tax consequences. For example, a spouse who purchased digital currency four years ago for $100,000 might now be sitting on an asset with a current value of $500,000. If the asset is liquidated before it is distributed between the spouses, the IRS may want the couple to pay capital gains taxes on the $400,000 increase in value. During settlement negotiations, couples should use the post-tax value of the cryptocurrency being divided.
Cryptocurrency is owned anonymously, and it can be difficult to trace. Because these assets exist outside of the mainstream financial system, they cannot be traced through traditional means. For this reason, spouses who want to hide assets may be tempted to put them into digital currencies.
Although tracking cryptocurrency is more challenging than most other financial assets, it is still possible for digital forensic experts to trace them; because there will usually be a transaction history that leads back to a traditional financial institution such as a bank, PayPal, or a credit card.
In most situations, divorcing spouses will not intentionally try to hide assets such as cryptocurrencies. But if you suspect that your spouse is trying to hide anything, let your attorney know right away so they can advise you on how to deal with a situation like this.
Work with a Seasoned Virginia Divorce Attorney
Cryptocurrency is an asset that we are likely to hear a lot more about in the future when it comes to divorces. And when dealing with complicated issues like this, it is always good to work with a skilled and knowledgeable divorce lawyer.
If you are facing a divorce in Virginia, Buck, Toscano & Terezkerz is here to help. Call our Charlottesville office today at (434) 977-7977 or message us online to schedule a free initial consultation. We look forward to serving you!