Navigating Cryptocurrency Assets in Separation Proceedings
Navigating a divorce can be overwhelming, especially when it comes to understanding and managing finances. One area that might seem particularly daunting is cryptocurrency. Whether you've heard about it in the news or you're 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. In this article, we'll break down the basics of cryptocurrency, its potential impact on your divorce, and some strategies for navigating this complex topic.
What is cryptocurrency?
Cryptocurrency 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, such as Coinbase or Binance. 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, a digital ledger that links data blocks chronologically to form a permanent and unalterable record. Unlike traditional currency, there is no third party, such as a central government or bank, regulating cryptocurrency, allowing for 24/7 trading and greater privacy.
Where can you buy it?
There are several ways to acquire cryptocurrency, including purchasing it directly from other users or through a centralized exchange like Coinbase. 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.
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. Given the 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.
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. You can choose to divide ownership, liquidate the assets and distribute the proceeds, or exchange one asset for another. Regardless of how you choose to divide the cryptocurrency, it's important to factor in the tax implications and work with a financial advisor familiar with crypto to ensure you're making the best decision for your financial future.
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. Cryptocurrency investment involves a high level of risk due to its volatility and lack of regulation. Consider your financial goals, risk tolerance, and investment horizon before making any investment decisions.
For those going through a divorce, navigating the potential gains and pitfalls of cryptocurrency can be a complex and emotionally charged process. With the right information and guidance, however, you can make informed decisions and protect your financial interests.
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