Increasing number of divorce proceedings involve crypto

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Increasing number of divorce proceedings involve crypto

Most crypto investors probably aren’t thinking about divorce or what will happen to their digital assets in the event of separation, but lawyers say i

Most crypto investors probably aren’t thinking about divorce or what will happen to their digital assets in the event of separation, but lawyers say it’s becoming a very common scenario as more people hold crypto assets. 

Last year, market research firm GWI suggested that as much as 10.2% of global internet users aged 16 to 64 own crypto, with most ownership skewed toward nations experiencing high inflation or fluctuation in the value of their national currency.

Independent data and statistics tracker World Population Review suggests the divorce rate worldwide varies between lows of 0.15 divorces per 1,000 residents in Sri Lanka to highs of 5.52 per 1,000 people in the Maldives.

Divorce rates by country. Source: World Population Review

Speaking to Cointelegraph, Claire Walczak, a senior associate from independent law firm Lander & Rogers, who works in the firm’s family and relationship law practice, says family lawyers are seeing an increasing number of divorce settlements featuring 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 matter involving digital assets.

According to Walczak, once divorce proceedings start, the court follows a process to determine how property and financial matters will be settled.

This can include determining what assets are available for division, assessing the parties’ respective contributions, considering whether it is just and equitable to make any adjustments, and evaluating each party’s future needs.

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

Walczak says both parties to a property settlement are entitled to retain the crypto as part of their overall property settlement entitlements, regardless of whose name it is held.

If both parties seek to retain the crypto and fail to reach an agreement, courts may consider factors such as, who paid for the crypto, and who owns the wallet, when deciding who retains the asset.

“As part of this process, the court identifies and values the existing assets of the parties, which includes all digital assets,” Walczak said.

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

Market fluctuations can affect values

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

Bitcoin (BTC) — the largest cryptocurrency by market capitalization — achieved an all-time high of over $68,000 on Nov.10, 2021, but has since lost a considerable portion of its value and sits at roughly $28,000 at the time of writing.

Recent: Bitcoin is on a collision course with ‘Net Zero’ promises

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

“This can pose a risk to clients seeking to retain a large proportion of their property settlement entitlements in the form of cryptocurrency. This may need to be factored into the property settlement,” Walczak said.

“Once the value is determined, the parties can negotiate as to who will retain the cryptocurrency or, if neither party wishes to retain the cryptocurrency, whether it will be sold,” she added.

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

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

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

“Once it is determined who will retain the cryptocurrency or whether it will be sold, this can be documented in court orders,” she added.

According to the legal research platform Lexology, the 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 of Powell vs. Christensen, where one party in divorce proceedings had purchased crypto, and the other sought the digital asset to be valued at its original purchase value rather than the market price.

The party who purchased the crypto argued that its value had decreased significantly since the purchase but did not disclose any documentation to support the case.

Ultimately, the Family Court of Australia determined the purchase value should be used for the divorce settlement rather than the…

cointelegraph.com