Cryptocurrency, bitcoins and divorce
12th November 2018 by Fiona Hotston Moore
Cryptocurrency has existed for nearly a decade and it’s now estimated that there is €700 billion held in these virtual currencies. Therefore, it is unsurprising that cryptocurrency is now appearing more frequency in divorce cases. Furthermore the nature of this asset and the relative ease at which it can be hidden may attract spouses to consider using cryptocurrency to hide wealth.
So what are the key points to be considered in relation to cryptocurrency and divorce?
What is cryptocurrency?
Cryptocurrency is a virtual currency and there are a number of different currencies including bitcoins, Ethereum and Litecoins. It exists on the cloud and is held in a so called virtual “wallet” that is, in effect, a piece of software. The individual who controls the wallet can direct where the currency resides and how the currency is used to acquire goods, services or assets. The transactions do not require the involvement or supervision by a bank or other third party.
Transactions within the system can be hard (but not impossible) to trace. However, the existence of cryptocurrency is often identified when the currency is purchased through a conventional bank account, when it is transferred back into a bank account or when it is used to fund purchases without conventional money changing hands.
The currency is extremely volatile and the value can double or halve within a few days.
The currency can be acquired using traditional bank accounts or it may be “mined”. Mining involves confirming and documenting cryptocurrencies for other holders. It tends to be an activity undertaken only by experts but can generate substantial wealth.
How should cryptocurrency be dealt with in a divorce?
Cryptocurrency should be disclosed as with any other asset and if there is a suspicion of hidden funds a direct disclosure should be sought. If no disclosure is made but there remains a suspicion it may be possible to identify the existence from transactions in conventional bank accounts where the currency is acquired or converted back into traditional currency. If the sums suspected are significant it may warrant forensic analysis for digital traces by a specialist but it is notoriously hard to find, value and prove ownership.
If a party has disclosed the existence of a cryptocurrency reserve, a decision must be made on how to value it bearing in mind the volatility of the value and speculative nature of the currency. It may also be necessary to consider the tax consequences of the holding. Transactions in bitcoins and other cryptocurrencies are proving hard for tax authorities to categorise. They may be treated as currency or commodities and activity could be deemed as trading, gambling (not taxable) or investment.
Finally, in view of the ability to hide the currency it is often used for illegal activity such as money laundering, tax evasion, terrorism etc and therefore advisers will need to consider their wider obligations to the authorities.
In conclusion, a decade on cryptocurrency is here to stay and features in divorces where there is significant wealth and perhaps a motive to hide the wealth. It cannot be ignored but specialist input may be needed if the suspected value justifies the cost.
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