A Growing Number of Divorce Proceedings Involve Crypto

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Most crypto investors probably don’t think about divorce or what will happen to their digital assets if they separate, but lawyers say it’s becoming a very common scenario as more people hold assets in crypto.

Last year, market research firm GWI suggested that up to 10.2% of global internet users between the ages of 16 and 64 own crypto, with most owners geared towards countries with high inflation or fluctuations in the value of their national currency.

The independent data and statistics tracker, World Population Review, suggests that the global divorce rate ranges from lows of 0.15 divorces per 1,000 people in Sri Lanka to highs of 5.52 to 1. 000 inhabitants in the Maldives.

Divorce rate by country. Source: World Population Review

Speaking to Cointelegraph, Claire Walczak, a senior partner at independent law firm Lander & Rogers, who works in the firm’s family law and relationships practice, said family lawyers are seeing an increasing number of divorce settlements involving digital assets.

She says it’s a rapidly changing and evolving area of ​​law, so it’s important to have specialist family law advice if you have a case involving digital assets.

According to Walczak, once divorce proceedings begin, the court goes through a process to determine how property and financial issues will be resolved.

This may include determining the assets available for division, assessing the parties’ respective contributions, determining whether to make adjustments, and assessing each party’s future needs.

The same process applies when dealing with digital assets. Both parties to the divorce are required to disclose all documents regarding their assets, digital or otherwise.

Walczak says that both parties to a property settlement have the right to keep the crypto as part of their overall property settlement rights, regardless of whose name it is owned.

If both parties seek to keep the crypto and cannot reach an agreement, courts may consider factors such as who paid for the crypto and who owns the wallet when deciding who keeps the asset.

As part of this process, the court identifies and values ​​the parties’ existing assets, which include all digital assets, Walczak said.

In the case of cryptocurrency, the value of the type of asset is determined by the open market and can be assessed through an exchange, she added.

Market fluctuations may affect values

The crypto market can be volatile at the best of times, with exchange crashes and other factors driving values ​​down without warning.

Bitcoin (BTC), the largest cryptocurrency by market cap, reached an all-time high of over $68,000 on November 10, 2021, but has since lost a considerable portion of its value and sits at around $28,000 as of today. time of writing.

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Walczak says volatile and rapid fluctuations in crypto value can be a factor when dividing assets during divorce proceedings.

This can pose a risk to clients looking to keep a large portion of their property settlement rights in the form of cryptocurrency. That may need to be factored into the property settlement, Walczak said.

Once the value is determined, the parties can negotiate who will keep the cryptocurrency or, if neither party wants to keep the cryptocurrency, whether it will be sold, she added.

She noted that another consideration for family lawyers is that people who acquired crypto as an investment asset must pay capital gains tax on any disposal, trade or exchange.

According to Walczak, if both parties to a divorce agree that the crypto should be sold as part of the property settlement, then capital gains tax will be realized and become part of the asset pool.

If, however, a party chooses to retain the cryptocurrency as an investment, capital gains tax will not be triggered, and the party retaining that asset may hold substantial unrealized capital gains, said Walczak.

Once it is determined who will keep the cryptocurrency or if it will be sold, it can be documented in court orders, she added.

According to legal research platform Lexology, case law on issues relating to cryptocurrency and its value is limited. However, there have been several high-profile cases in recent years where the value of crypto assets has taken center stage.

Lexology cites the 2020 Australian case Powell v Christensen, where one party to a divorce proceeding purchased crypto, and the other sought to have the digital asset valued at its original purchase value instead. only at market price.

The party that bought the crypto argued that its value had dropped significantly since the purchase, but did not disclose any documents supporting the case.

Ultimately, the Family Court of Australia determined that the purchase value should be used for the divorce settlement rather than the reduced market value.

Staking and divorce

Walczak says crypto staking rewards can also be part of either spouse’s income and are recorded on their individual tax returns the same way dividends are treated.

Crypto staking involves locking up crypto holdings to earn interest or rewards. Staking is also how specific blockchain networks verify transactions.

This will have the effect of increasing the spouses’ taxable income, which could impact their final property settlement rights, she said.

She also noted that if a spouse chooses to retain crypto staking rewards, they will retain a potential income-generating asset, which may impact that party’s property settlement rights.

A party may also request to be paid in a particular currency, which may include crypto; however, Walczak says a party cannot choose to pay another party in a currency where it is considered disadvantageous to the recipient of that payment.

Laws in place to keep everyone honest

In a recent case, a New York couple’s divorce proceedings took a turn after an accountant helped track down BTC’s husband’s stash, which he was trying to hide from his wife.

Australian digital assets lawyer Joni Pirovich told Cointelegraph that, generally speaking, crypto tokens are included in the pool of assets to be divided in the event of a divorce.

Pirovich, the director of Blockchain & Digital Assets, also noted specific laws requiring each spouse to be honest about assets and other forms of property owned.

During her career, she has had experience with crypto divorce cases before and revealed that there are options available to help track down any hidden crypto.

According to Pirovich, one party often knows the other bought crypto, but the other isn’t telling the truth or knowing how to aggregate the information.

In some cases, a legal request is made to the other party to produce the information, she said.

In other cases, I have provided contacts such as crypto tax specialists or crypto forensics specialists to assist in the identification of crypto tokens held and profits/losses made from crypto token activities on assets with fair and equitable distribution of property in the event of divorce, she added.

Prenuptial and Crypto Contracts

A prenuptial agreement, or prenuptial, is a joint legal agreement that a couple enters into before getting married regarding ownership of their respective property in the event the marriage breaks down.

According to Pirovich, crypto can be included in any binding financial agreement, including a prenup-style agreement.

She says that if a binding financial agreement exists, then specific rights to specific assets, such as crypto tokens, must be honored in accordance with that agreement.

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However, if there is no prenup, factors such as length of marriage, financial and non-financial contributions throughout the marriage, and whether one party becomes primarily or substantially responsible for the children are relevant factors in dividing the marriage. asset pool.

Often the party not involved in the crypto tokens does not want to receive a share of the crypto tokens but rather the amount of fiat currency invested, or their share of the profits on the sale of the crypto tokens paid to them in fiat currency, Pirovich said. .

Ultimately, to avoid any problems along the way, she advises honest and open discussions with a partner about finances on a regular basis.

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There may be emotional reasons why a person seeks to maintain a level of financial independence from the marriage and from assets considered jointly owned by the couple. This tends to happen for people who remarry after a first divorce, Pirovich said.

At least annual discussions should take place about crypto and the couple’s financial situation as part of annual tax filing obligations, and at least every three years when the couple reviews their wills and estate planning documents and revisions necessary, she added.

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