Cryptocurrency and Divorce: What You Need to Know

Divorce is complex, especially when finances include unfamiliar assets like cryptocurrency. Whether you've heard about cryptocurrency (“crypto”) in the news or you're facing it in your divorce settlement, understanding what it is and how it might impact your financial future can help you make more confident decisions.

What is cryptocurrency?

Crypto is a type of digital currency that exists only online and can be used as a form of payment or investment. Most people purchase cryptocurrency through exchanges, where they use a digital wallet to store private keys. These wallets vary in security and privacy. Transactions are recorded using blockchain technology, a secure digital ledger made up of linked data blocks.

Unlike traditional currency, crypto isn’t regulated by a central bank or government. That means it can be traded 24/7 and offers a higher degree of privacy. While there are thousands of cryptocurrencies, Bitcoin and Ethereum are the most well-known and widely used.

Many investors view crypto as a way to diversify beyond stocks and bonds. It’s a fast-growing, innovative asset class, but it’s also high risk. Crypto prices can swing wildly in a short period, and the market is still relatively new. While adoption is increasing, regulation remains uncertain.

There’s also a risk of loss or theft if proper security measures aren’t in place. Unlike banks, crypto holdings have no built-in protection. You are solely responsible for safeguarding your own assets.

From an estate planning perspective, crypto creates unique challenges. If a person passes away without sharing wallet access, those assets may be lost permanently. That’s why it’s critical to work with a knowledgeable estate planning team.

Where can you buy it?

The most common way to buy crypto is through a centralized exchange like Coinbase, which offers a user-friendly experience, security features and customer support.

Some advanced users prefer decentralized exchanges, which allow peer-to-peer trading without an intermediary. These platforms offer more privacy and control but can be confusing for beginners.

Today, investors can also gain crypto exposure through exchange-traded funds (ETFs). These track the price of cryptocurrencies and can be held in a regular brokerage account, with no digital wallet required.

Why cryptocurrency poses challenges in divorce

In a divorce settlement, crypto 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 crypto in divorce.

Locating crypto

Unlike traditional financial assets, crypto 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. It could potentially be used as a place to hide assets.

Crypto can be stored in “cold wallets” (offline) or mobile apps that require a private key to access. If you suspect your spouse owns crypto, forensic accountants can help trace it. They may review bank records for transfers to exchanges or scan devices for digital wallet activity.

Valuing crypto

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 crypto

There are various ways to divide crypto during divorce. It is important to consult with professionals who are experienced with crypto to determine the appropriate strategy for your situation. Here are some of the options:

• Split the crypto: Each spouse receives a portion. This requires both parties to set up their own digital wallets.
• Sell and split the proceeds: This avoids the need for a wallet but may trigger capital gains tax, so consult your advisors first.
• Offset with another asset: One spouse keeps the crypto, while the other receives a different asset of equal value.

Crypto and your broader financial plan

While you may not be choosing to invest in crypto yourself, it may still end up in your portfolio post-divorce. Work with your advisor to decide whether to keep it, sell it, or exchange it for more traditional holdings. And if you do keep it, make sure you have proper security protocols in place, including secure wallet storage and clear estate planning instructions.

You don’t have to become a blockchain expert to protect your financial future. But you do need to ask the right questions and work with professionals who understand this evolving asset class. We’re here to help you can navigate wisely and emerge with clarity and confidence.

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