Many people label Bitcoin as “fake internet money”. Others (myself included) believe it to be the great leap in monetary technology that the world has needed for centuries. Those who deny the superior utility of Bitcoin fail to understand that all money currently provided by governments is mainly digital and can be devalued without your consent by printing money and causing massive inflation and socio-economic misery to the citizens. For example, the Australian dollar has lost 98% of its value over the last 100 years. It is not surprising that the popularity of cryptocurrency investments continues to grow. In 2021, it was estimated that 25% of all Australians owned some form of cryptocurrency, with Bitcoin being the most prominent.
The Family Court treats Bitcoin and other digital based blockchain assets in the same manner as any other asset. It has a monetary value and is part of the total asset pool. Bitcoin needs to be negotiated and litigated in the same manner as all other assets with monetary value. This should be understood in line with the Australian Tax Office’s treatment of bitcoin as a class of capital investment. This article provides practical information for Family Lawyers and those involved Family Court negotiations or litigation where there is suspected or known cryptocurrency assets.
Disclosure and Investigation
In Family Law property settlements, the first crucial step is to identify the asset pool, where both parties are expected to fully and candidly disclose their assets and liabilities. Despite this expectation, the reality is that not everyone adheres to this obligation. Family law practitioners frequently come across clients who suspect their spouses of concealing assets, but lack concrete proof. In recent times, the trend in hiding assets has shifted from offshore accounts to cryptocurrencies.
Currently, tracking cryptocurrency assets can be exceptionally challenging, especially if the owner has taken basic measures to conceal their actions. While it’s possible to trace crypto-asset purchases made through an exchange linked to a bank account, uncovering acquisitions made through third parties or deep net accounts and stored in hardware wallets is significantly harder. These scenarios require a detailed forensic analysis to trace the funds used to purchase the currency. This process is not only time-consuming but also incurs substantial legal and accounting costs.
The importance of a strong understanding of cryptocurrency and its workings has become increasingly crucial when assessing disclosures in family law proceedings. Cryptocurrency, with its unique properties and the way it operates, presents new challenges and opportunities in the realm of financial disclosures and asset division.
When dealing with cases that potentially involve cryptocurrency, it’s imperative for lawyers to discuss in detail with their clients about their own or their ex-partner’s cryptocurrency holdings. This conversation is the first step in unravelling the often complex web of crypto assets, which might be overlooked or misunderstood. Given the decentralized and somewhat opaque nature of cryptocurrencies, obtaining a clear picture of these assets requires a meticulous approach.
Scrutinizing bank accounts for transfers to cryptocurrency exchanges is a crucial aspect of this investigation. These transfers can often be the initial breadcrumb leading to the discovery of cryptocurrency investments. Traditional bank statements might show transactions to entities like Coinbase, Binance, Coinspot, Bitaroo or other exchanges, indicating that funds have been used to purchase cryptocurrencies. Similarly, looking for transactions to services such as Moonpay, which facilitate the buying of cryptocurrencies, can uncover hidden or undisclosed crypto assets.
Once the involvement with cryptocurrency is established, the next step involves a thorough review of cryptocurrency exchange documents. These documents can provide valuable insights into various activities such as whether the cryptocurrency has been sold, converted to alternate currencies, or transferred off the exchange to personal wallets or staking applications. Such movements of crypto assets are pivotal in understanding the individual’s financial landscape and can significantly influence the outcome of the proceedings.
Moreover, auditing the blockchain provides a transparent and detailed record of where cryptocurrencies have been sent. The immutable nature of blockchain technology allows for the tracing of asset transfers, which is essential in cases where there may be attempts to conceal or move assets strategically ahead of or during legal proceedings.
Lastly, it’s essential to consider cryptocurrency incomes, especially in situations where parties may be involved in crypto mining or staking investments. Crypto mining and staking can be a significant source of income, and understanding its impact on the individual's financial status is vital. This includes evaluating the scale of mining operations and the resultant income, which might contribute to the financial pool under consideration in family law cases.
The integration of cryptocurrencies into the financial landscape presents new dimensions in family law proceedings. A strong grasp of how cryptocurrencies work, coupled with a strategic approach to uncovering and understanding these assets, is essential for a comprehensive and fair assessment of financial disclosures in family law cases. This requires staying informed about the latest developments in cryptocurrency, using technology to trace and understand crypto transactions, and maintaining a vigilant approach to uncover all potential assets.
Tax Implications
In the realm of family law, when dealing with the tax implications of Bitcoin and other cryptocurrencies, lawyers must be keenly aware of the capital gains tax (CGT) considerations. Similar to the tax implications accompanying the receipt of investment real estate property in settlements, any increase or decrease in the value of the cryptocurrency since its purchase can lead to either a CGT liability or a capital loss tax credit when the cryptocurrency is converted back into Australian Dollars, or swapped into other cryptocurrency assets. Therefore, it is essential for lawyers and accountants to have detailed information about the purchase prices of the cryptocurrency to accurately assess the associated tax liability.
Many Bitcoin or other crypto investors employ a strategy known as dollar-cost-averaging, where they purchase their holdings incrementally over time, investing a fixed amount regularly, regardless of the investment's price. This strategy, contrasting with the one-time transaction typical in real estate investments, helps in mitigating the impact of market volatility and often results in a lower average cost per share. Understanding this purchasing pattern is crucial when negotiating the disbursement of Bitcoin pursuant to court orders. Lawyers need to ensure that investors provide comprehensive disclosure of their purchasing and trading history to calculate the tax liability accurately. This involves ascertaining the overall purchasing cost and the "Average Cost Basis" of the total holdings. It is important that lawyers obtain taxation advice from accountants who specialise in cryptocurrency taxation prior to finalising settlements.
Capital Gain Events
The classification of cryptocurrency transactions as CGT events when held as an investment is a critical aspect. Transactions involving the disposal, exchange, or swap of crypto assets lead to either a capital gain or loss. If the crypto asset is held for at least 12 months, there might be eligibility for a CGT discount, potentially reducing the tax burden. However, crypto assets held as an investment are not considered personal use assets and are not exempt from CGT. Keeping meticulous records of each crypto asset and transaction is paramount to accurately determine capital gains or losses.
Understanding the timing and type of CGT events is essential in managing crypto assets. These events could include selling, gifting, trading, exchanging, or swapping crypto assets, converting them to currency, or using them to purchase goods or services. The calculation of CGT for crypto assets follows the same principle as other CGT assets, based on net capital gains for the year. Lawyers must ensure complete record-keeping of crypto transactions and convert the values into Australian dollars for accurate CGT calculation. Utilizing online tools for calculation and record-keeping can aid in this process, ensuring compliance and precision in tax obligations.
Other Cryptocurrency Taxation Events
Cryptocurrency taxation can be complex, involving specific events such as chain splits and staking, which have unique tax implications. Understanding these events is essential for cryptocurrency investors to ensure accurate tax reporting and compliance.
A chain split, where a single blockchain diverges into two or more competing versions, can result in investors receiving new crypto assets. These new assets are not immediately classified as ordinary income or a capital gain at the time of receipt. However, when you dispose of these assets, you need to calculate the capital gain or loss, considering that the cost base of the new asset received from a chain split is zero. Holding the new asset for more than 12 months may entitle you to a CGT discount.
The role of staking in cryptocurrencies also has tax implications. Staking involves locking your crypto tokens to validate transactions and create new blocks, with forgers receiving additional tokens as rewards. These rewards are treated as ordinary income at the time of receipt. When disposing of these staked assets, you must calculate whether you have made a capital gain or loss.
Airdrops, another method of distributing crypto assets, can have different tax treatments based on their nature. Established tokens received through airdrops are considered ordinary income at the time of receipt. However, tokens from an initial airdrop, where there has been no prior trading, are not considered ordinary income or a capital gain at the time of receipt. Their cost base is zero unless a payment was made for them. The capital gain or loss must be calculated upon their disposal, with eligibility for a CGT discount if held for over 12 months.
When exchanging or swapping one crypto asset for another, you are disposing of a CGT asset and acquiring another. The market value of the new asset in Australian dollars is essential to determine the capital proceeds of the disposed asset. If you can't determine the value of the new asset, use the market value of the disposed asset instead.
Given these complexities, it is clear that specialized taxation expertise is crucial for those involved in cryptocurrency investments. Accurate record-keeping and understanding of the specific tax treatments of various crypto-related events are vital to ensure compliance and optimal tax outcomes.
Settlement Drafting - Example Orders
The following are example orders which can be utilized in Family Court proceedings where the parties own Bitcoin. Please note that we make no representation as to the appropriateness of these orders in any case or circumstances. Please consult with a lawyer and accountant for specialised advice about what Orders are appropriate in your circumstances.
1. Within 30 days of the date of these orders, all bitcoin controlled and owned by the parties in either hardware wallets, on bitcoin exchanges or otherwise staked in decentralized finance services or applications be dispersed between the parties as follows:
a) With 60% of the total Bitcoin to be transferred to the Applicant’s nominated bitcoin wallet address.
b) With 40% of the total Bitcoin to be transferred to the Respondent’s nominated bitcoin wallet address.
2. On the 30th day from the date of these Orders, the applicant to transfer to the nominated bank account of the respondent the cash value of 0.61256 Bitcoin with such exchange rate to be determine by reference to the CME CF Reference Rate published at 4:00pm Perth time (REFERENCE RATE (APAC)).
3. On the 30th day from the date of these Orders, all bitcoin controlled and owned by the parties in either hardware wallets, on bitcoin exchanges or otherwise staked in decentralized finance services or applications be sold and the net proceeds of sale be distributed with the Applicant receiving 60% and the Respondent receiving 40%.
4. Within 72 hours of the vesting of all staked Bitcoin from decentralised finance applications, returning to the depositor, or otherwise being available for withdrawal, the total Bitcoin available be dispersed between the parties as follows:
a) With 60% of the total Bitcoin to be transferred to the Applicant’s nominated bitcoin wallet address.
b) With 40% of the total Bitcoin to be transferred to the Respondent’s nominated bitcoin wallet address.
5. From the date of these orders, the parties hereby indemnify one another in relation to any tax liabilities relating to, or deriving from, the receipt of Bitcoin into their custody, or the vesting of Bitcoin, in accordance with these Orders.
Conclusion
In summarizing the complexities surrounding Bitcoin and other cryptocurrencies in family court proceedings, it becomes increasingly clear that consulting with experts is paramount. The unique challenges posed by these digital assets necessitate specialized knowledge and expertise, particularly when ensuring accurate and complete disclosure in the context of family law.
Cryptocurrencies, with their inherent potential for concealment and complex valuation methods, present a novel frontier in family law settlements. This underscores the importance of thorough and meticulous disclosure processes. Family law practitioners must ensure that all parties fully understand and transparently exchange information regarding their cryptocurrency holdings. This is crucial in unearthing the true extent of these digital assets and ensuring a fair and equitable division.
If you require any assistance with negotiations, drafting settlement documents, or finding and auditing crypto currency holdings please contact our office and we would be happy to provide whatever assistance is required.