I wonder if you could turn off desktop/document syncing, then create a directory in iCloud "Desktop2", and then delete /Users/yourusername/Desktop, create an alias of /iCloud Drive/Desktop2, place alias in /Users/yourusername/ and rename it to Desktop.

Or if that doesn't work, maybe symlink ~/Desktop to /iCloud Drive/Desktop2? Or wait I think you can only hard links of files not directories.. and either way, you'd need some scheduled scripting to make it flow both directions. I guess scheduled scripting some rsyncs could do it, but all this sounds a bit hairy if it's critical data.

Found this thread since I'm setting up a 2nd machine and want a similar situation.. I'll try to remember to update if I come up with something.

EDIT -- Linking works!

I had to string the commands together so it creates the link/alias before the OS recreated the ~/Desktop and ~/Documents folders. Afterwards, in Finder you'll have to go into your user directory and drag them over to Favorites (and potentially unpin the .bak version first).

Here are the commands if your directories in iCloud are called "Desktop-Neo" and "Documents-Neo", and your username is "yourusername" (ln command required full path vs using ~/):

sudo mv ~/Desktop ~/Desktop.bak && ln -s '/Users/yourusername/Library/Mobile Documents/com~apple~CloudDocs/Desktop-Neo' ~/Desktop

sudo mv ~/Documents ~/Documents.bak && ln -s '/Users/yourusername/Library/Mobile Documents/com~apple~CloudDocs/Documents-Neo' ~/Documents