What every divorce lawyer needs to know about cryptocurrency.

Byline: Jonathan E. Fields

As the market capitalization of all cryptocurrency approaches $300 billion, it seems a primer on cryptocurrency for divorce practitioners is timely, if not overdue.

The basics

Digital currency, a form of currency that is available only in digital or electronic form, and not in physical form, can be used to buy goods and services from persons and companies who are willing to accept it. It can also be bought and sold like a stock for investment purposes.

The first currency, Bitcoin, was invented in 2009 to operate without a centralized institution such as a bank or the Federal Reserve. Instead, the underlying framework for Bitcoin is the blockchain: a peer-to-peer immutable distributed ledger to generate computational proof of the chronological order of the transactions.

The blockchain is essentially a single agreed-upon history of the order of transactions. It works much like when a buyer swipes a credit card at Starbucks and the transaction is approved after communication with the credit card company. Although an oversimplification, for our purposes here it is enough to know that both buyer and seller know the transaction is a good one when the blockchain substantiates it.

Cryptocurrency can be obtained in a few different ways. It can be "mined." These "miners" help work on the blockchain so that each transaction gets approved. Miners have to solve complex mathematical algorithms in order to do so and are rewarded with Bitcoins or other cryptocurrency for their efforts.

More commonly, however, people can buy cryptocurrency on exchanges. This can be as easy as opening an account at, say, Coinbase or Kraken, and buying cryptocurrency with a credit card.

Also critical for the divorce practitioner to know: Many of these exchanges have "know your customer" requirements requiring identity verification. Further, U.S.-based exchanges (such as Coinbase or Kraken) report certain transactions to the Internal Revenue Service. The company completes a 1099-K for customers receiving at least $20,000 in cash for sales of virtual currencies that are related to at least 200 separate transactions in a calendar year.

Some states have their own requirements. Massachusetts, for example, requires that institutions complete the 1099-K for Massachusetts customers with transactions of $600 or more in a calendar year.

The IRS treats cryptocurrency as property and not currency for purposes of taxation, and, as such, long-term and short-term...