Cryptocurrency ownership presents challenges beyond tax considerations for Australian investors. For instance, in family law proceedings, issues relating to the existence and valuation of cryptocurrency (“crypto”) can complicate matters, particularly during property settlements between parties. This article offers some general guidelines to addressing crypto assets in property proceedings so as to ensure a just and equitable settlement for the parties involved.
Identifying and Valuing Crypto Assets
Disclosure Obligations
Australian family law requires that all parties to a family law dispute, exchange with each other all relevant information relating to the dispute. In particular, in property proceedings, there are specific rules regarding full and frank disclosure of each parties’ assets, liabilities, and financial resources. Cryptocurrencies are classified as assets, however, unlike most assets for which ownership is easily identifiable (such as cash and property) the decentralised and often anonymous nature of cryptocurrencies can make it difficult for lawyers and accountants to identify and verify their existence.
Seeking disclosure of Cryptocurrencies
Some suggested ways in which disclosure of cryptocurrencies may be sought include:
- Establish whether your ex-partner holds any cryptocurrencies. This may be something you already suspect or know about.
- Make specific requests for the production of information relating to all crypto holdings, including those currently held and any that were disposed of in the year immediately before separation or since the final separation.
- If requests for information are not forthcoming, serious consideration should be given to whether you initiate court proceedings to compel the other party comply with their disclosure obligations, by way of court order and/or through the issuing of subpoenas to cryptocurrency exchanges or third parties to access transaction records.
- Engage forensic crypto accountants, like Tax On Chain, who specialise in tracing and valuing undisclosed digital assets.
Valuing cryptocurrencies can be particularly challenging due to their volatility. Indeed, the value of crypto can fluctuate significantly within a short time period. To address this issue and mitigate fluctuations, it may be advisable:
- For the separating parties to agree on a specific date on which the crypto assets are valued for the purposes of finalising the matrimonial property pool available for division; and
- To consult professionals who can deliver precise valuations of cryptocurrency on the agreed date.
Certain crypto assets, like unclaimed rewards, Liquidity Pool Tokens, and Non-Fungible Tokens (NFTs), can further complicate the process due to their complexity and fluctuating value. These assets are often difficult to identify and assess, especially for those unfamiliar with digital assets. Forensic crypto accountants use specialised tools to trace and accurately value these tokens as at a specific date.
Division of Crypto Assets
Crypto assets are divided using the same principles as other marital assets, with a focus on a just and equitable distribution of the assets. Methods used to divide these assets include, but are not limited to:
- Direct Division:
- Transfer half of the cryptocurrency directly to the other party’s digital wallet.
- Alternatively, divide the assets based on an agreed-upon proportion of the matrimonial property pool, reflecting each party’s contributions and future needs.
- Offsetting Assets:
- Allocate the cryptocurrency to one party while compensating the other with equivalent value in other marital assets, such as real estate, shares, superannuation or cash.
- Selling and Splitting Proceeds:
- Liquidate the cryptocurrency holdings and divide the proceeds between both parties.
Legal and Tax Considerations
The legal framework surrounding cryptocurrencies in the context of separation and property settlements continues to evolve. It is crucial to seek specialist advice regarding the application of family law rules, regulations and legal precedents to the division of digital assets during separation proceedings. Additionally, due consideration should be given to the tax consequences of cryptocurrency transactions such as:
- Capital Gains Tax (CGT): determination of whether transferring or selling crypto assets will create CGT liabilities; and
- Income Tax: consideration of whether claiming certain crypto tokens will result in a taxable event.
Seeking tax advice from crypto tax professionals to understand the tax implications of transactions involving crypto assets and to ensure compliance with Australian tax laws is highly recommended. Experienced legal representation is also essential in such cases. A lawyer specialising in family law and cryptocurrency, alongside a crypto accountant, can provide invaluable guidance.
If you are the owner of cryptocurrencies, it is worth highlighting importance of maintaining thorough records of all cryptocurrency transactions, including purchase dates, amounts, and wallet addresses. This documentation will support transparency and accuracy throughout separation proceedings to ensure compliance with disclosure obligations.
Contact Us
As the digital asset landscape continues to evolve, staying informed is critical when managing the challenges and opportunities presented by crypto assets in family law. With the right legal and accounting support, just and equitable solutions can be achieved in property settlements involving cryptocurrencies.
This article is not legal advice and is intended to provide general guidance and information only. For advice tailored to your specific circumstances relating your cryptocurrency holdings, please contact us.
