Cryptocurrency and Family Law
Cryptocurrency is a rapidly growing market. The rising popularity of cryptocurrency investment means it is increasingly common to see cryptocurrency feature amongst the assets comprising the asset pool.
The relative anonymity of cryptocurrency transactions, combined with its notorious volatility means cryptocurrency presents a range of challenges which require prudent family law advice and, in most instances, swift action following separation.
At Empower Family Law and Mediation we understand the unique nature of cryptocurrency and can assist you to ensure the asset is properly accounted for and fairly divided following separation.
How is crypto different to other forms of currency?
Cryptocurrencies are a form of digital money that can be transferred from one person to another via online exchanges or ‘wallets’, without the necessity for an intermediary third-party, for example a bank, facilitating the transaction. Cryptocurrency purchases and transfers can occur quickly and anonymously, making them difficult to trace.
While traditional forms of currency are regulated by the government and their ‘value’ is subject to monetary policy, cryptocurrency is not controlled by a bank or government, instead cryptocurrencies use blockchain and a decentralised ledger, meaning that no one individual or supervisory agency controls the actions in the network; cryptocurrency can be exchanged and traded directly between wallets with no intermediary. Consequently, cryptocurrency is incredibly volatile, with most cryptocurrencies experiencing huge fluctuations in their valuation in often very short time-frames.
What is the blockchain?
Cryptocurrency transactions occur on a form of ledger called a blockchain. Most people are familiar with how spreadsheets and databases operate. A blockchain is somewhat similar, it is a database where information is entered and stored. However, the key difference between a traditional database or spreadsheet and a blockchain is how the data is structured and accessed.
Blockchains store data in blocks linked together via cryptography. In some instances, for example, Bitcoin, the blockchain is decentralized so that no single person or group has control—instead, all users collectively retain control. These decentralized blockchains are immutable, meaning the data entered is irreversible. For Bitcoin, transactions are permanently recorded and viewable to anyone.
However, although all users can see all transactions made and received by any user, the identity of the user may not be known. The only evidence of ownership is a private valid key. If the user loses this digital key or is not forthcoming with the details for the key, their bitcoins cannot be traced, which can make identifying cryptocurrency problematic for parties to family law matters.
Why is cryptocurrency so attractive?
A number of unique factors make cryptocurrency an attractive investment:
- Cryptocurrency markets have been subject to massive gains (and losses) in very short timeframes.
- Cryptocurrency transfers are private.
- Cryptocurrency is not subject to inflation in the same manner as traditional forms of currency.
- Cryptocurrency exchanges generally do not charge transaction fees.
- Ownership of cryptocurrency is based on possession of a private key rather than the owner’s registered identity, making ownership difficult to trace.
Cryptocurrency and Capital Gains Tax
In Australia, the sale of cryptocurrency is a Capital Gains Tax (CGT) event and will attract capital gains tax. Therefore, trading cryptocurrency over a long period may mean significant capital gains tax liabilities have accrued which will be realised upon settlement if cryptocurrency is sold.
It is important to have taxation advice as to the CGT likely to be payable on cryptocurrency profits if they are to be sold as part of any settlement before formalising a settlement agreement.
Tracing Cryptocurrency
Cryptocurrency is kept in hot and cold ‘wallets’. A hot wallet exists online and can be accessed by the owner at any time. Cold wallets are not online, instead they are held on storage devices, for example a USB stick. Wallets are accessible only via a private valid key which is not readily linked to an individual user. Consequently, without the key, wallets cannot be accessed.
This sense of anonymity presents a very real challenge for family lawyers. Because cryptocurrency is not readily linked to an individual, ownership can be difficult to trace. As there is no central regulatory body, cryptocurrency records cannot be subpoenaed, and the records of ownership are often stored on a person’s devices. There are often no traditional paper records which can assist in determining the value of the asset.
However, there are a few tools and strategies available to assist in tracing and locating cryptocurrency:
- As all cryptocurrencies are initially acquired using traditional currency, ownership can often be traced through banking records. A prudent step is to review bank and credit card statements for transactions to or from known exchanges. Common exchanges include eToro, Binance, Coinbase, Bitfinex, Gemini, Huobi, LocalBitcoins, CoinDCX, Kraken and Coinbase Exchange, however this list is not exhaustive.
- As the sale of cryptocurrency is a Capital Gains Tax event, Income Tax Returns and Assessments may confirm holdings and trading over time.
- Brokerage account statements, if available, will detail cryptocurrency exchanges and will assist in an assessment of holdings and value.
- Businesses which accept Bitcoin and other cryptocurrencies may be subject to subpoena requiring them to provide documents to help track and identify purchases made using cryptocurrency.
- Expert forensic analysis of electronic devices and personal email accounts may evidence the use of cryptocurrency trading apps and uncover information about the wallets.
- An analysis of email accounts may reveal virtual currency ‘addresses’ used to receive payments.
- Expert forensic accountants specialising in blockchain investigation can be engaged advise and assist in matters where unscrupulous ex-partners are seeking to hide transactions.
- In some instances, Courts may grant freezing and seizing orders to assist parties to ascertain cryptocurrency holdings.
Valuing cryptocurrency
Determining the value which ought to be attributed to cryptocurrency in a family law matter can be challenging. As cryptocurrency exists in an unregulated and volatile market, the value of cryptocurrency is subject to massive fluctuation. Holdings which have a substantial value one week may significantly de-value the next.
While it is relatively simple to ascertain the value of cryptocurrency at any single point in time using the individual exchange rate for the particular currency, the difficulty lies in assessing the value which ought to be attributed to the asset where a party has traded cryptocurrency secretively and is not forthcoming with the details of their holdings and transactions over time.
Great care must be taken in assessing the value of a party’s cryptocurrency holdings. It is important to engage a family lawyer who knows the issues and understands the relevant case law.
What if my ex-partner has traded crypto-currency behind my back?
Despite that cryptocurrency is a relatively new form of asset, a body of case law is developing to assist the Courts and parties in matters where cryptocurrency is a feature.
For example:
In the 2020 case of Powell & Christensen, the Wife asserted that the Husband had prematurely distributed funds by drawing $100,000 from the joint account and investing them in cryptocurrency that he said had devalued over time so that by the time the matter came to trial it was worth only $47,000. The Wife sought that an amount be notionally ‘added back’ to the value of the cryptocurrency in order to restore the value to the original purchase price. The Court included the cryptocurrency in the pool at its purchase price of $100,000.
At Empower Family Law & Mediation we understand the complexities of crypto currencies and we are able to help clients trace and identify those assets to optimise their settlement.
From your very first conference with us you will know where you stand, what your options are and what to expect.
That is why your first 30-minute consultation with us is FREE.