High net worth divorces are often complex because of the variety of assets spouses have accrued during their marriage. Most types of property have decades of precedent to help guide the process. However, the rise of cryptocurrency has created a new asset class that must be addressed when couples split.
Cryptocurrency and related assets like NFTs are unique in the financial world. That can lead to complications as couples attempt to split their property under California’s community property laws. Here’s what you need to know about how cryptocurrency is divided in divorce and the best way to address it fairly.
Cryptocurrency as an Asset
Cryptocurrency, more frequently called “crypto,” is an entirely new asset class. Crypto was initially intended to be a virtual currency, allowing people to make transactions online and in the real world. However, it quickly became a form of investment as well.
Traditional currencies are issued by national governments and backed by assets or the government itself. For example, United States dollars are given value because they are recognized by the federal government as the way to repay debts to the state. This is not the case with cryptocurrency.
Instead, individual cryptocurrencies are created by companies or individuals and are not backed by a central authority. Bitcoin is the most well-known and valuable of crypto, but there are thousands in existence. They rely on digital transaction registers known as the blockchain to confirm ownership. The value of a given cryptocurrency is determined by the community instead of a government.
Proponents of cryptocurrencies argue that this is one of their primary benefits as investments. If everyone agrees that crypto is extremely valuable, it is. However, opinions are heavily divided on whether crypto is worthwhile or worthless.
How Crypto Is Divided During Divorce
In the United States, cryptocurrency is classified not as a currency but as property. That means that if you receive cryptocurrency during your marriage, it is not counted as income. However, it is considered part of your marital assets unless you have a prenuptial or postnuptial agreement stating otherwise. As such, any cryptocurrency wallets you or your spouse may have acquired during your marriage are likely eligible for asset division.
In California, community property laws mean that spouses have a right to half of all marital assets. However, this does not necessarily mean that every asset and investment a couple shares must be split down the middle. Depending on your preferences, there are three ways you can choose to divide these assets during a California divorce:
- Splitting: If both spouses agree on the value of a crypto investment, the simplest solution is often to split it equally. Crypto is liquid and fungible, making it easy to transfer to others with no change in worth. Spouses can divide their joint cryptocurrency holding equally, then they can do whatever they want with their share afterward.
- Selling: If one spouse does not want any crypto, selling may be worthwhile. If one spouse wants to keep the entire crypto investment, they can buy out the other person’s share in cash at market rates. Otherwise, the couple can divide the investment down the middle, and the recipient can sell their half immediately. While this is efficient, it also exposes the seller to capital gains tax if the cryptocurrency has increased in value since it was purchased.
- Valuing for offset: Cryptocurrencies can be used as a bargaining chip while negotiating a divorce settlement. For example, if one spouse would prefer full ownership of the family home over half the crypto investment, they can offer their share of the crypto to their partner in exchange for the house.
Both splitting and selling are reasonably straightforward. However, if you choose to value crypto for offset, you should prepare for a more complicated process.
How to Value Crypto for Offset During Asset Division
When valuing crypto for offset in your divorce, there are several factors you must consider:
- The worth of the other asset: Before you can consider how much cryptocurrency to offer as an offset for another item, you must determine the value of the asset you want. For example, if you offer your spouse something in exchange for the house, you need to identify your spouse’s share of the home’s value. This is likely half the house’s most recent appraisal minus half the remaining mortgage balance. The assets you offer as an offset should be approximately equal in value.
- Swings and crashes in crypto value: Now you can value the crypto itself. Most cryptocurrencies experience significant swings in value daily. If your portfolio consists of relatively stable currencies, you may value it at the market value on the day you file for divorce or when your order is finalized. However, if your portfolio is more volatile, you can use a rolling average of its value over time as its value. For instance, you may use a 12, 26, or 52-week rolling average to smooth out short-term ups and downs.
- Capital gains tax: Depending on the asset you want to offset, your spouse may request a capital gains tax discount in addition to the cryptocurrency. If a portfolio has significantly increased in value since it was purchased, it cannot be used or sold without being taxed at rates as high as 20%. If you’re using the crypto to offset an asset with fewer capital gains, your spouse may request additional cryptocurrency assets to account for the possible tax burden they are accepting. This a significant consideration in high net worth divorces, where mitigating taxes becomes a significant concern.
Expert Legal Counsel for Dividing Cryptocurrency in Divorce
Crypto can make dividing your assets more complex, especially if you have a significant portfolio. At Kaspar & Lugay, LLP, we have the skills and experience to help you divide your assets fairly during a California divorce, cryptocurrency included. Learn more about how we can help you decide what to do with crypto during divorce by scheduling your consultation today.