Dividing cryptocurrency in divorce: 7 big things you need to know

As digital currencies like Bitcoin and Ethereum grow in popularity, the challenge of how to divide cryptocurrency in divorce has become more relevant than ever.

The Family Law Act 1975 governs property division upon a separation, although it doesn’t specifically address cryptocurrency. As such, the process of dividing digital assets requires careful consideration.

Here’s what you need to know about dividing cryptocurrency upon separation.

1. Understanding cryptocurrency as property under the Family Law Act 1975

Cryptocurrency refers to digital or virtual currencies, like Bitcoin, Ethereum, or Litecoin, that rely on blockchain technology for security and are not controlled by any central authority like a bank or government. This can make it more difficult to trace, especially when one party tries to hide or downplay the value of their holdings. 

The Family Law Act 1975 allows for the division of “property” between separated couples. Matrimonial property encompasses all assets, liabilities, superannuation, and financial resources in which the parties have an interest, whether held jointly, individually, or through corporate entities and trusts, both in Australia and internationally. While the law does not specifically mention cryptocurrency, it is generally treated as a form of property subject to division in the same way as other financial assets, such as real estate, bank accounts, and investments. However, issues may arise as to the disclosure of the cryptocurrency and how it is valued and practically divided. 

2. Valuation of cryptocurrency

Valuing cryptocurrency can be tricky, as its price fluctuates significantly. Unlike traditional assets, whose values are relatively stable, the value of cryptocurrencies can change dramatically from day to day or even hour to hour.

The present value of the cryptocurrency will typically be utilised at any court hearing; however, parties can also utilise other value dates, such as the cohabitation date or separation date, in order to reach an agreement or decision. Experts may be needed to track and calculate the exact amount of cryptocurrency held by either party. 

3. Locating cryptocurrency assets

One of the most challenging aspects of dividing cryptocurrency is locating it. Unlike physical assets or traditional bank accounts, cryptocurrency transactions are often recorded anonymously, and its not a commonly utilised asset between spouses. Under the Family Law Act 1975, both parties are required to provide full and frank disclosure of all their assets during family law proceedings, including cryptocurrency. The reality is, however, that some spouses may take advantage of the decentralised nature of cryptocurrency and try to hide the asset. If you suspect your spouse is hiding cryptocurrency assets, forensic accountants or blockchain investigators can help trace transactions and uncover hidden digital assets.

4. Dividing cryptocurrency

Once the cryptocurrency is valued, there are different ways it can be dealt with in order to reach a just and equitable settlement under the Family Law Act 1975, such as: 

Direct Division:

This approach involves splitting the cryptocurrency holdings according to the agreed-upon settlement. If one spouse owns the cryptocurrency, they may need to transfer the agreed-upon share to the other spouse’s digital wallet.

Offsetting with Other Assets:

In some cases, one spouse may retain full ownership of the cryptocurrency while the other is compensated with other marital assets, such as property, savings, or other investments. This can be an effective solution when one party wishes to keep their digital assets, but the other needs an equitable share of the property pool. 

Selling the Cryptocurrency:

Another option is to sell the cryptocurrency and divide the proceeds.

The main risk with all the above options is the volatility of cryptocurrency prices. A party may believe they are walking away with a particular settlement, and the very next day, the price of the cryptocurrency could be dramatically different and therefore see a very different outcome. This could be to one’s benefit, of course; however, it could also be dire. Once the deal is done and orders are made, there is very little, if anything, that can be done to rectify that situation. There are also tax consequences to consider in any scenario that need to be accounted for. It is therefore imperative that you seek legal advice and consider all likely scenarios before agreeing to any property settlement, particularly if the cryptocurrency forms a large part of the property pool.

5. Tax implications of dividing cryptocurrency

Cryptocurrency is often subject to capital gains tax when sold or transferred, and this can complicate the division of assets. If one spouse sells cryptocurrency or transfers it to the other, there may be tax implications based on the difference between the purchase price and the value at the time of transfer.

When dividing cryptocurrency, it’s essential to consider the potential tax consequences. This may require consulting a tax professional or financial advisor who understands the specific tax regulations around cryptocurrency.

6. Protecting your cryptocurrency assets

If you’re concerned about cryptocurrency holdings being divided in divorce, there are several steps you can take to minimise any dispute: 

Keep records:

Maintain thorough records of cryptocurrency purchases, trades, and transfers. This will help establish a clear picture of your holdings.

Use a secure wallet:

Consider using a secure digital wallet to store your cryptocurrency. Wallets that are stored offline (cold wallets) could also offer an added layer of protection.

Full disclosure:

Be prepared for a full disclosure of all assets, including cryptocurrency. An attempt to hide assets will likely do more harm than good to your case.

7. What to do if you suspect your spouse is hiding cryptocurrency 

If you suspect your spouse is hiding or obscuring cryptocurrency during a divorce, here are some steps you can take:

Be financially aware:

Try to be in control of the family finances as much as the other party. It is common for one party to manage the day-to-day finances in a relationship; however, ensuring you’re both overall aware of and have access to the finances of the relationship can reduce the risk of surprises down the track.

Gather Financial Documents:

Locate bank statements, tax returns, and digital transaction records and look for any unidentified transactions.

Ask Directly:

If comfortable, ask your spouse about their cryptocurrency holdings.

Hire a Forensic Accountant:

Consider a professional to track hidden digital assets.

Review Tax Returns:

Cryptocurrency transactions may appear in tax returns.

Look for Red Flags:

Be aware of signs of hidden assets, like lifestyle changes.

Ensure Full Disclosure:

Make sure to request and obtain full disclosure during the property settlement process.

Consult a family lawyer:

Obtain legal advice from an experienced family lawyer early on.

Handling cryptocurrency in separation and divorce

Dividing cryptocurrency following a separation presents unique challenges, from determining its value to ensuring its fair distribution. The volatile nature of digital currencies and the difficulty in tracing transactions require careful consideration. Whether you’re the one holding the cryptocurrency or you suspect your spouse is hiding assets, it’s important to work with professionals, including financial advisors, forensic accountants, and your family lawyer, to ensure that all assets are fairly divided.

With proper planning and expertise, dividing cryptocurrency in a divorce can be handled just like any other asset, ensuring that both parties receive an equitable share of the property pool.

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