A digital divorce
We’re living in a digital age and dividing up the cryptocurrency is becoming increasingly relevant to divorce proceedings and property settlements.
Firstly, what is cryptocurrency? Essentially, it’s a digital form of money that can be transferred electronically from one person to another, via a “wallet” or online exchange.
Cryptocurrency exchange is traced by a “blockchain”, a growing list of records called blocks linked together using cryptography. Each block contains a timestamp and transaction data.
As each block contains information about the block before it, they form a chain – hence the term blockchain – with each additional block reinforcing the ones before it.
There are several different cryptocurrencies trading, the most popular being Bitcoin.
In family law, cryptocurrency is an item that each person has an obligation to disclose to the courts and provide any documents they might have. It’s classified as an asset and can be included in a property settlement.
However, if one person fails to disclose their cryptocurrency assets, it can also be hard to track.
Unlike bank accounts that are easily linked to the owner, the ownership of a cryptocurrency is not so evident. Records of ownership are usually stored digitally in a person’s mobile or laptop device and statements are not forwarded in the mail.
The first step is to ascertain whether your ex-partner has cryptocurrencies. If you happen to know or suspect they do, the second step is to find out how much cryptocurrency they have, before you can move to the third step of placing a dollar value on those assets.
One of the trickiest aspects of valuing cryptocurrency is its volatility. There are instances where the value of a particular cryptocurrency has experienced swings of up to 20 per cent in a single day, or up to 80 per cent in the space of a month.
The ownership of cryptocurrency over a long period means there may be significant unrealised capital gains which could incur a large amount of tax payable on sale of the cryptocurrency.
Although considering the value of assets at separation is a sound method in most cases when dividing an asset pool, cryptocurrency carries a much higher risk of extreme value depreciation or appreciation.
Timing is also particularly important, as the time frame between separation and agreement could mean an 80 per cent drop in value or a 500 per cent increase.
One recent decision that involved cryptocurrency was Powell & Christensen.
Their relationship started in 2006 and they separated in 2017. The couple had two children aged 8 and 11 years.
The husband had invested approximately $100,000 in cryptocurrency in breach of an injunction that had been ordered earlier.
Despite not producing any documents, the husband said the cryptocurrency was now only worth $47,000.
The wife asked the court 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 judge notionally included the cryptocurrency in the balance sheet at its purchase price of $100,000.
Looking at when the husband was said to have purchased the cryptocurrency in relation to the date of the trial, it may well be that treating this asset as having a notional value of $100,000 resulted in a windfall to the husband.
Dealing with digital assets and cryptocurrency during separation and property settlement is an evolving area of law.
Michael Lynch Family Lawyers can offer you advice tailored to your individual circumstances. Contact our office on: (07) 3221 4300 or email: [email protected] to make an appointment with one of our family law specialists.
