Dealing with digital assets as part of a divorce

Anyone who has ever been through a divorce will attest to how disruptive and painful it can be. All the things that have been counted and enjoyed as part of married life have to be divided up, separated, liquidated, transferred or sold. Customarily, this has meant the matrimonial home, any holiday homes or investment property, share portfolios, pension funds and even that antique carriage clock which was a wedding present from Great Aunt Gwendoline. Now, and in addition to all of that, there are digital assets.

What are digital assets?

The term ‘digital assets’ in this context refers specifically to cryptocurrencies and NTFs, or Non-Fungible Tokens. The most famous of these is Bitcoin but there are others too and almost every week witnesses the birth of a new cryptocurrency. Over the last decade or so, cryptocurrencies have gone from being a highly arcane speciality to a widespread and widely adopted alternative store of wealth, investment and speculation.

In 2021, it estimated that nearly 10 million people in the UK own cryptocurrencies and that Bitcoin alone had created some 100,000 millionaires. Banks and governments all over the world now look set to launch their own crypto, or digital, currencies and, as an asset class, cryptocurrency seems as if it is here to stay. For sure, digital assets can longer be ignored or dismissed.

The disclosure problem

During divorce proceedings, both parties are required to give a full disclosure of their respective assets in order to come to a divorce settlement agreement. If one party decides to be less than honest in this process, they are likely to have a hard time, given that there is no way to easily mask assets such as property, shares, pensions or even chattels. However, non-disclosure of digital assets in divorce are more tempting because cryptocurrencies are stored in digital files known as “wallets” which have no physical presence or counterpart. Furthermore, crypto transactions are recorded on a blockchain by means of an encrypted address. Consequently, it is very easy to lie about the existence of any such wallet or lie about the contents.

As things stand, establishing that a party possesses cryptocurrency that they are deliberately concealing can by an analysis of bank records, as the most common way of acquiring cryptocurrency is by means of cash payments of fiat currency from real-world bank accounts. For example, a bank statement may reveal a record of a payment to a crypto exchange which is sufficient evidence upon which to base further enquiries. Similarly, the services of a forensic accountant could be employed to seek any ‘fingerprints’ located in bank statements, business accounts, tax returns or even electronic devices. If a wallet is disclosed or discovered, then there are specialist companies who can trace the disposal or attempted disposal of any coins from it.

If all else fails and one party has evidence that the other party has been active in the crypto market, then it is open to the court to draw the inference that the crypto assets do exist and a value should be assigned to them when dividing up the matrimonial pot.

The volatility issue

Despite its growing respectability and widespread use as a vehicle for investment, the crypto market is still dogged by an alarming degree of volatility. For example, in the year from January 2020 to January 2021 the value of Ethereum rocketed by 750% and then, between January 2021 and January 2022, it increased by a further 180%. Bitcoin has proved every bit as volatile. It is far from unknown for other crypto assets to swing wildly in value over much shorter time frames. It is conceivable that the parties could be arguing over a crypto asset that is worth, say, £100,000 on Friday, only for them to wake up on Monday morning to find it worth half of the sum or double that sum.

Taking aim at such a swiftly moving target in order to establish a value is, therefore, a very difficult task. It has been suggested then that a possible solution could be for a court to order that a crypto holding is simply shared in specified percentages so that each party shares the risks or rewards of any volatility that follows.

Tax issues

It has long been established that crypto assets are property. So, they are subject to taxation like any other asset. When couples go their separate ways, any assets that are transferred between them are subject to Capital Gains Tax (CGT). However, a transfer pursuant to a divorce settlement will be exempt from CGT provided the actual transfer takes place by the end of the tax year in which the parties separated.

If you are going through divorce, or you are thinking of filing for a divorce, and you believe that your spouse has crypto assets, then the best favour you can do for yourself is to consult an experienced family lawyer. For couples who have substantial assets, getting to a settlement can be a complex process, made more complex if one of both parties have crypto assets.

For further information and trusted legal advice regarding matters of divorce, get in touch with our Resolution-accredited divorce lawyers in London at Carlsons Solicitors.