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How do you divide digital currencies in a divorce?

On Behalf of | Jun 4, 2021 | Divorce |

According to industry groups, over 20 million Americans own some kind of digital currency, such as Bitcoin, Dogecoin, or Ethereum. The total digital currency market is valued at $2 trillion for the first time this year. When a spouse or couple has dabbled in digital currency, how is it fairly divided?

As the market has grown, the division of digital currently has increasingly become an issue in divorces. Digital currencies are volatile and can be hard to value correctly. Moreover, sales of digital currency are taxed at the capital gains rate, which can apply when you divide your digital currency accounts. And, digital currencies are only as valuable as your private key is protected.

Nailing down a value

With the growth of digital currency rising so quickly, the value of a particular digital currency investment can be hard to pin down. It will be a moving target because the price may fluctuate widely during the divorce process.

For example, one certified financial planner told CNBC that your digital currency could start out being worth $200,000 at the beginning of the divorce process, then suddenly drop or rise to half or double that.

A good way of handling the volatility is to take it into account in your divorce agreement. For example, you could say that if its value changes by a certain percentage, there would be corresponding changes in the division of other assets to keep things fair. Set a firm date for the ultimate valuation, such as the date your divorce decree is finalized, and try not to take it too hard if the value has dropped a bit by that date.

Taxation

When you sell digital currency, the transaction is taxed at the capital gains rate. The reality is that you may have to sell it in order to divide it. Alternatively, one spouse could get the entire digital currency account while the other spouse gets a corresponding amount in other assets.

If you plan to split your digital currency account, you may find that the currency exchanges have little experience in transferring digital coin from one account to another. Traditional investments are often handled by trustees and transferring from one trustee-run account to another can sometimes prevent a taxable event. This is less certain with digital currencies, as the law is still evolving. Your divorce attorney may recommend hiring a financial professional to do the transfer.

Your private key should remain private

You should try to structure your agreement so that only a trusted third party, such as a fiduciary, has access to your private key. Your private key is the password that allows you to access and manage your digital currency account and it provides full access. Ideally, you would not share this private key with your divorcing spouse.

If you have significant holdings in digital currency, talk to your divorce attorney. He can help you decide whether to sell and divide the assets or set them off against other assets during the property division process and answer your other questions about fair division.