Dealing with digital assets during divorce proceedings introduces a layer of complexity that requires specialised knowledge. As cryptocurrencies such as Bitcoin, Ethereum, and others grow in popularity, family lawyers in England and Wales face the increasingly intricate challenge of addressing these assets. Navigating the intersection of cryptocurrency and divorce demands an understanding of both the legal framework and the technical nature of these digital investments. This article delves into the legal and financial challenges posed by cryptocurrencies in divorce cases while offering insights into best practices for effectively addressing these issues.
Understanding Cryptocurrency as an Asset Class
To address digital assets in divorce, it is important first to understand what cryptocurrency is and how it is characterised under the law. A cryptocurrency is a form of decentralised digital currency that uses blockchain technology to facilitate secure, transparent transactions. Unlike traditional bank accounts or investments, these digital assets often exist outside standard financial systems, which makes them harder to track and value.
In the legal context of England and Wales, cryptocurrencies are treated as “property” rather than as currency. Following the decision in cases such as AA v Persons Unknown & Ors (2020), the court recognised cryptocurrency as a form of property that can be secured and seized, setting a precedent for acknowledging these intangible assets in matrimonial disputes. It is within this framework that family lawyers and courts must determine how to deal with these assets during the division of marital property.
Locating Cryptocurrencies
One of the first hurdles in addressing cryptocurrencies during divorce proceedings is determining their existence. Unlike traditional assets recorded in bank accounts or investment portfolios, cryptocurrencies are often held in anonymous wallets, which can make them difficult to trace. In a divorce context, one spouse may attempt to hide or downplay these assets due to their intangible nature and lack of regulatory oversight.
Parties to a divorce must provide full and frank disclosure of their financial situation, including any cryptocurrency holdings. However, the decentralised nature of blockchain technology enables users to conduct transactions pseudonymously, making it possible for individuals to conceal such assets. Forensic accountants and other financial experts may be necessary to uncover hidden cryptocurrencies, often by tracing transactions recorded on the blockchain. Even so, this is a time-intensive and costly process.
When one party suspects undeclared cryptocurrency holdings, they may serve a formal request for disclosure or apply to the court for appropriate orders. Penalties for non-disclosure can include costs orders against the non-compliant party or an award of assets in favour of the compliant spouse.
Valuing Cryptocurrencies
Once the existence of cryptocurrency holdings has been established, assigning a value to these assets is the next challenge. Unlike fiat currencies or traditional financial instruments, the value of cryptocurrencies is extremely volatile and can fluctuate significantly over short periods. For example, in 2021, Bitcoin experienced a price swing of tens of thousands of pounds within months. This unpredictability adds complexity to determining their fair market value.
Courts and practitioners typically rely on the spot market price on a specific date as the basis for valuation. However, given the volatility of this asset class, parties often debate the appropriate date for valuation, whether the transfer date, the separation date, or another point in time. Additionally, various cryptocurrencies have differing levels of liquidity; some are easier to trade or convert into cash than others. These factors further complicate the valuation process.
To navigate this challenge, it is advisable to work with cryptocurrency financial experts who can provide an accurate valuation of assets at a specific point in time. Such professionals may also offer insights into the potential tax liabilities associated with cryptocurrency transactions, which are an important consideration during divorce settlements.
Dividing Cryptocurrencies Fairly
Under the matrimonial law of England and Wales, the court aims to divide marital assets in a way that is “fair,” taking into account factors such as the length of the marriage, the financial needs of both parties, contributions made during the marriage, and available resources. Dividing cryptocurrencies presents additional obstacles due to their intangibility, volatility, and unique storage mechanisms.
One option is for the party holding the cryptocurrency assets to retain them while offsetting their value with other assets, such as property, cash, or investments, to achieve an equitable division. This approach avoids the practical challenges of splitting cryptocurrencies. However, it requires both parties to agree on the value of the cryptocurrency at the time of settlement and accept any future gains or losses as the responsibility of the holder.
Another approach is for the cryptocurrency to be divided directly between both parties. This involves transferring a portion of the assets from one digital wallet to another. While technically possible, this process may be fraught with complications, as it requires both parties to understand how to manage cryptocurrency wallets. Consideration must also be given to any fees or costs associated with the transfer.
Finally, there may be instances where the court orders the liquidation of cryptocurrency holdings, with the cash proceeds divided between the parties. Liquidating cryptocurrencies has its own risks, primarily because of price volatility and trading fees. If the sale is completed at a disadvantageous time, it may result in reduced value for both parties.
Navigating Tax Implications
Cryptocurrency transactions are subject to UK tax laws, and while these laws do not fall specifically under the jurisdiction of England and Wales, they are a critical consideration in divorce cases. Capital Gains Tax (CGT) applies to the disposal of cryptocurrencies in certain circumstances, such as selling, trading, or gifting them.
Transfers of assets between spouses are generally exempt from CGT during the tax year in which they separated. However, any transfers occurring after this period may trigger a tax liability. While the spouse retaining the cryptocurrency assets typically becomes liable for any future tax obligations arising from those assets, it is important for both parties to take professional tax advice to ensure compliance.
Accountants and tax experts specialising in cryptocurrency can provide essential support in understanding how CGT applies to these assets and ensuring that any financial settlement does not inadvertently create an unfair tax burden.
Future Trends and Challenges
The legal treatment of cryptocurrencies in England and Wales is still evolving. As blockchain technologies become more widespread and mainstream, courts and practitioners will likely encounter new complexities. For example, the rise of decentralised finance (DeFi) platforms may make it harder to trace and value cryptocurrencies, while the increasing use of Non-Fungible Tokens (NFTs) as investment vehicles may introduce additional categories of intangible digital assets to consider.
In addition, changes in regulation could impact the disclosure, valuation, and tax treatment of cryptocurrencies. As the legal landscape adapts, it will be essential for both lawyers and divorcing parties to stay informed about developments in this fast-paced field.
Best Practices for Addressing Cryptocurrencies in Divorce
Given the challenges associated with digital assets, adopting best practices can simplify the process of addressing cryptocurrencies in divorce. These include:
– Maintaining open and honest communication and full financial disclosure throughout the divorce process.
– Engaging financial and legal experts who specialise in cryptocurrency to ensure accurate valuation, tax compliance, and fair division of assets.
– Considering the long-term implications of retaining cryptocurrencies, given their volatility and tax implications.
– Keeping adequate records of all cryptocurrency transactions, including wallet addresses, transaction history, and initial investments, to support or challenge claims effectively.
Conclusion
Cryptocurrency is an emerging frontier in family law, presenting unique challenges for divorcing couples in England and Wales. While the legal framework for dealing with these digital assets is still developing, the principles of fairness, transparency, and equity remain core to the division of marital property. Addressing cryptocurrencies in divorce requires a nuanced understanding of the technical, legal, and financial aspects of these assets. By taking a proactive and informed approach, parties and professionals alike can navigate this complex area of law more effectively.