Family lawyers are seeing an increasing number of settlements featuring digital assets, with cryptocurrencies being the most common form of digital asset.
Division of digital assets by the court
The court applies a five-step process in determining how property settlement and financial matters will be settled. The same process applies when dealing with digital assets including cryptocurrency.
The court identifies and values the existing assets of the parties, which includes all digital assets. In the case of cryptocurrency, the value of the asset type is determined by the open market and can be assessed via an exchange. As an asset type, cryptocurrency can be volatile and exhibit rapid fluctuations in value - sometimes 20% in a single day. This can pose a risk to clients seeking to retain a large proportion of their property settlement entitlements in the form of cryptocurrency. This may need to be factored into the property settlement.
Once the value is determined, the parties can negotiate as to who will retain the cryptocurrency or, if neither party wishes to retain the cryptocurrency, whether it will be sold.
Capital gains tax
Another important consideration for family lawyers is that parties who have acquired cryptocurrency as an investment asset are required to pay capital gains tax on any disposal, exchange or swap. If it is agreed that the cryptocurrency is to be sold as part of the property settlement, then the capital gains tax liability will be realised and form part of the asset pool. If, however, a party elects to retain cryptocurrency as an investment, then the capital gains tax liability will not be triggered and the party retaining that asset may hold substantial unrealised capital gains.
Once it is determined who will retain the cryptocurrency or whether it will be sold, this can be documented in court orders. Cryptocurrency can also be included in a binding financial agreement, including a pre-nuptial style agreement.
Cryptocurrency can pose issues for family lawyers when it comes to disclosure. There is an obligation on both parties to provide full and frank disclosure of their financial circumstances, however, if one party fails to disclose their cryptocurrency holdings it can be challenging for family lawyers to trace. Unlike bank records, cryptocurrency cannot be subpoenaed and records are usually stored digitally on a person's mobile phone or laptop device.
Ownership of cryptocurrency may need to be traced by analysing bank statements to search for transactions linked to cryptocurrency. If a party is gifted cryptocurrency, then there will be no transaction record, making it much harder to identify.
Both parties to a property settlement are entitled to seek to retain the cryptocurrency as part of their overall property settlement entitlements, regardless of whose name it is held in.
If both parties seek to retain the cryptocurrency and they cannot reach agreement, then the court may consider factors such as who paid for the cryptocurrency and whose name the cryptocurrency wallet is under in determining who should ultimately retain the cryptocurrency.
Crypto staking rewards and taxable income
"Crypto staking rewards" form part of either spouse's income and are recorded on their individual taxation returns - similar to how dividends are dealt with. This will have the effect of increasing that spouse's taxable income, which may impact upon their final property settlement entitlements. Further, if a spouse elects to retain the "crypto staking rewards" they will be retaining a potential income-generating asset, which may impact upon that party's property settlement entitlements.
Can property settlement entitlements be paid in cryptocurrency?
If cryptocurrency forms part of the asset pool available for division between the parties, then it is possible for either party to seek to retain the cryptocurrency as part of their overall property settlement entitlements.
It is typical for family law settlements to be conducted in the currency relevant to the jurisdiction of the matter. Where a matter involves assets held in different jurisdictions and countries with different currencies, a settlement may involve payment in multiple currencies. A party may request to be paid in a particular currency, which could include cryptocurrencies. A party cannot necessarily elect to pay another party in a currency where it is seen to disadvantage the recipient of that payment. This is further complicated by the volatile nature of cryptocurrency.
This is a rapidly changing and evolving area of law, and it is therefore essential to seek specialist family law advice if you have a matter involving digital assets.
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