A primary part of the separation process in Australia is the identification and distribution of the assets of the relationship.

With the increasing likelihood that cryptocurrency will form part of those assets, separating parties can face some unique challenges when it comes to dealing with crypto as part of a divorce. While Bitcoin is probably the most famous and popular, there are now millions of forms of crypto around the world, so there is an increasing likelihood of crypto coming up during divorce.

In this guide, we’ll set out the issues you need to be aware of if you’re going through separation with a spouse who has digital assets in the form of cryptocurrency.

What is Cryptocurrency?

To help us understand some of the complexities around cryptocurrency in divorce, it’s probably good to have a (very) brief primer on what cryptocurrency is and an understanding of the basics of how it works.

At its core, crypto is just a form of currency like Australian Dollars, US Dollars or any of the many others.

Where it differs from normal currency is that it (typically) has no need for a central controlling authority, such as a bank or government. Instead, it is usually entirely digital and de-centralised.

As a digital asset, crypto in the past faced the problem of being copyable. To address this issue and help determine cryptocurrency ownership, cryptocurrency ownership is tracked and validated through a series of blocks of information, each of which builds upon the last, which shows the relevant string of transactions that resulted in any given individual owning a given “coin” or “token”. This string of information is called a blockchain.

Relevantly for us, cryptocurrency does not get held in a bank or other central location, and it is not held in the individual's name. This offers some unique challenges when it comes to cryptocurrency in divorce.

Disclosure of Cryptocurrency Assets in Divorce

While attempting to arrive at a property settlement with your ex, both you and they have a positive obligation to disclose all of their assets. Cryptocurrency is no exception and must be included in any disclosure.

However, because of its anonymity, some people may believe that they can get away with hiding cryptocurrency assets from the Court (or their spouse).

Because of the nature of the assets, they can be very difficult to track. There is nobody to subpoena or compel disclosure from such as a bank or stock exchange. This leads to challenges if you believe your spouse is hiding cryptocurrency assets.

This leads to a couple practical tips:

1. If you know your spouse invests in crypto, then take some time to understand how it works and the procedures they use to acquire it (of course, this is not likely to happen if you are already going through separation);
2. Sometimes, cryptocurrency is purchased using funds from a bank account, the details of which have been disclosed. It may be that looking through the transactions on a known account can reveal the existence of cryptocurrency assets;

If you can help your family lawyer understand the foundations of the currency that your ex invests in, then at least there might be some scope to investigate further or seek appropriate directions from the Court.

How (and When) Should Cryptocurrency Be Valued in Separation?

While the market value of ordinary shares and property can fluctuate, crypto is notorious for wild daily swings in value.

This leads to a challenging question: when should crypto be valued for the purposes of understanding its impact on the asset pool?

There is no one-size-fits-all answer to this question. There are, however, various factors that are going to influence the best approach.

First, you should ideally understand which crypto is held and how it has been valued by your ex. If the disclosure has been made but is inadequate (for example, no justification is given for the alleged value, or the type of digital currency is not stated), then further questions could be asked to ensure you can verify the information.

Next, armed (hopefully) with that information you can then monitor the value to see if, at any relevant time, the currency's value is significantly different from its normal range, or the disclosed value. You should check this, if possible, close to any relevant decision-making time, whether that is a court hearing, a mediation, or the conclusion of a negotiated outcome.

Finally, if you are negotiating with your ex about terms of a settlement, it might be that the cryptocurrency will be viewed differently depending on whether or not it is to be sold, or kept, and if kept then by who. Someone who believes strongly that the crypto is a solid investment for the future might view it as “more valuable” in a real sense, even if a valuation on the given day is low.

Capital Gains Tax on Cryptocurrency

As with all types of investment, bear in mind that any settlement or outcome that requires the sale of cryptocurrency will likely trigger a capital gains tax event – that somebody will have to pay.

This means that disclosure of how much the crypto was bought for should be disclosed, as it is relevant to the calculation.

It also follows that you should get tax advice if you are contemplating a transfer or sale or cryptocurrency and the amount is significant.

This should also be a relevant factor for both parties when deciding whether the currency should be sold or not as part of the outcome.

Should Cryptocurrency be “Sold” or Kept in Separation?

Like any assets in separation, there are two options:

1. Sell the asset and distribute its proceeds in a particular way between the parties;
2. Let the current owner keep the asset and account for its value in the outcome.

Either option is perfectly legitimate for cryptocurrency, and which is right will depend on many of the things we have discussed above.

For example, if one party strongly believes that the currency will increase in value and the other does not, then that party could hold on to the asset in the outcome as they view it as more valuable than the other. This might be a reasonable position to take in negotiations.

If the sale of the currency is likely to trigger a major capital gains tax issue, then it might be that neither party wants to deal with that at the present time. In this case there is a solid argument to keep the cryptocurrency rather than sell it.

If, however, the value of the crypto is not clear and is a major point of contention, then liquidating the asset through sale and conversion into Australian Dollars will solve that dispute and allow a fair distribution.

In short, you should weigh up the pros and cons of each option with your family lawyers, depending on the currency in question and the way that you and your ex view it in terms of value and longevity.

Do Crypto “Staking” Rewards Count in Separation?

“Staking” is a way of using your cryptocurrency to generate passive income, also in the form of the currency itself.

It should be disclosed and treated in the same way as any other form of income in separation and is largely subject to the same considerations and concerns that we have set out above.

Need Help Working through a Crypto Issue?

With more and more people investing in cryptocurrency, it is important to have a basic understanding of how it works and the impact it could have during separation.

If you need help working through a property settlement with your ex (whether crypto is involved or otherwise) get in touch with our family lawyers, and we’ll help you through the entire process.