When The Asset Cannot Be Touched
We are hearing more and more about digital assets such as cryptocurrencies and non-fungible tokens (NFTs) in the news as these types of assets become more popular. What we are still unsure of, in many aspects, is how assets that cannot be physically touched work with various important areas of law, including tax law and divorce law.
Here are some important factors to keep in mind as digital assets become more prevalent in divorce.
The Difficulty in Assessing Value
Digital assets are treated like stocks in many ways, one of those ways being a constantly fluctuating market. A cryptocurrency such as Bitcoin could increase in value by thousands of dollars over the course of a few weeks only for that value to drop significantly over a few hours.
In addition, the NFT market has demonstrated that it has had false sales, meaning the creator and seller of an NFT uses their own money to purchase their own asset, thereby “setting” the market for that piece. They then use that sale price as a means of negotiating with interested buyers when in reality the market value for that NFT may be far less than what it is actually worth. Careful research is essential when trying to value an NFT.
Because of these challenges in assessing value to a digital asset, you should work with an accountant who understands these difficulties and can help you assess fair market value for these assets.
The Issue of Transferring Digital Assets
The other primary difficulty with digital assets in a divorce is how these assets are transferred from one party to another if such assets are divided. Because digital assets are not held in traditional means such as a bank or a safe, transferring these assets between parties can be challenging.
In the case of cryptocurrencies and NFTs, these digital assets are often stored in digital wallets on secure networks. These wallets are almost always password protected and encrypted for maximum security.
In a divorce, if one party does not yet have a digital wallet but will be receiving digital assets, they may have to create a digital wallet in order for the transfer to take place. In addition, there are numerous laws concerning online security and password sharing that may need to be worked through in order to transfer these assets. Finally, it may be necessary to have someone such as a notary observe and sign off on successful digital asset transfer, but that may add further complexity to the online privacy considerations.
If assets are non-transferable, it may result in one spouse owing the other a more substantial equalization payment. Equalization payments are necessary when there is an unequal distribution of assets. The spouse who stands to receive a higher value of assets pays the other spouse to balance out the distribution. The payment equalizes the distribution, hence the name.
Ask Questions of an Attorney for Divorce
Because digital assets are still on the rise, much still needs to be done to determine exactly how to handle them in situations such as divorce. If you have questions about how to proceed with digital assets, you should be sure to consult with an attorney who understands asset division and transfer and can help you determine the best path forward.
At TRABOLSI | LEVY | GABBARD LLP, we can help you work through difficulties associated with complex assets such as digital assets. Learn more about how we can help with your California high-asset divorce or schedule a consultation with a member of our team by calling us at (310) 455-8364 or by visiting our website.