Cryptocurrency – Issues in Family Law Property Settlements

Tax Insights

In 2021, a survey indicated 25% of Australians had already invested in cryptocurrency or intended to invest within the next 12 months. 

The availability of smartphone apps for cryptocurrency exchanges and wallets means an increased number of taxpayers are now accessing this new and emerging form of investment.  

Investment in cryptocurrency and digital assets is expected to increase, and with it, the likelihood cryptocurrency and digital assets will make up part of the pool of marital assets. 

The decentralisation of blockchain technology and lack of regulation both in Australia and internationally leads to unique challenges in Family Law property disputes

The anonymity of the underlying blockchain technology poses a threat by providing cloak from behind which a party may attempt to hide cryptocurrency and other digital assets. Cryptocurrency and family law settlements

Where parties have invested in cryptocurrency or other digital assets challenges include identifying and documenting digital assets for financial disclosure purposes; determining the value of cryptocurrency and digital assets and; determining inherent and contingent tax liabilities and income tax consequences on transactions arising from Family Court orders.

What is cryptocurrency?

Cryptocurrency is a digital currency that can be used as a decentralised payment system, although not all cryptocurrency assets were designed to be used for this purpose. 

Cryptocurrency uses blockchain or ‘distributed ledger’ technology to record and verify transactions. In simple terms, it enables two people to transact directly with each other over the internet without the need for a third-party intermediary, such as a bank. 

The decentralisation and lack of regulation of cryptocurrency and other digital assets provides anonymity which in turn acts as an incentive for investors who are under the presumption their investment activity will be hidden. 

Identifying assets

In Australia, digital currency exchange providers (DCEs) are required to register with AUSTRAC and information on Australian digital currency transactions are provided to the ATO under a data matching program, however, there is no regulated centralized register of digital currency ownership. 

Users of cryptocurrency may use DCE’s to manage their holdings and to facilitate transactions and there are currently over 300 DCEs registered with AUSTRAC. Transactions with DCEs are generally initiated online or via a smartphone ‘app’ with cryptocurrency assets either managed within the platform or transferred to a cryptocurrency wallet, meaning access to information on holdings and transactions is electronic and stored on a digital platform. 

Cryptocurrency exchanges like Swyftx and Coinspot provide users with reports to track transactions for tax purposes which may be useful for financial disclosure purposes.

 For example, Swyftx users can download a Tax Report which can be tailored for specific date periods that includes a Crypto Statement detailing individual trades including deposits and withdrawals of Fiat currency, along with Closing Statements of both Crypto and Fiat currency held on the platform at any given date.  

Coinspot users have access to multiple order history reports including end of financial year balances (including prices) and details of transfers in and out of their account and, a buy and sell history.  These reports are easy to download and Family Lawyers and/or their clients may wish to request a copy of similar reports where cryptocurrency assets are identified within the asset pool.

Cryptocurrency tax calculators like CryptoTax and Koinly may also be useful in obtaining information for financial disclosure purposes.  The platforms produce cryptocurrency tax reports which may be of some assistance in identifying cryptocurrency assets as they integrate with many popular Australia-based cryptocurrency wallets and exchanges, drawing on transactional data to estimate Australian tax liabilities arising from cryptocurrency disposals. 

Cryptocurrency tax reports may provide valuable information for financial disclosure purposes however, reports may only be of use if the cryptocurrency user a) trades cryptocurrency in a financial year and b) uses a tax calculator to assist in determining their inherent tax liability. 

Valuation Issues

The value of cryptocurrencies can fluctuate by the minute and markets can be highly volatile making it difficult to determine and apply a representative value at a specific point in time. In 2021, a survey indicated 25% of Australians had already invested in cryptocurrency or intended to invest within the next 12 months. 

Even the value of well-known cryptocurrencies like Bitcoin, Binance, Ethereum, and Litecoin can fluctuate by the second. Non-fungible tokens (NFT) may be easier to value, as NFTs are generally a non-fungible digital representation of a separately identifiable and valuable asset (e.g. painting, musical work, real estate). Identifying the existence of an NFT however will present similar challenges to those with cryptocurrency because of the lack of any regulated centralised register of NFTs.

Taxation Issues

In Australia, cryptocurrency may be recognised as a personal use asset, a capital gains tax (CGT) asset, or may be treated on revenue account depending on how the cryptocurrency is used. 

Given the volatility of cryptocurrency and the length of time it can take to resolve property disputes, calculating contingent tax liabilities may be extremely difficult if not impossible.   Further challenges may arise where cryptocurrency assets are held in a cryptocurrency wallet or exchange platform located in a foreign jurisdiction resulting in international tax issues coming into play.

Whilst cryptocurrency investors can use cryptocurrency tax reports to assist in understanding their Australian income tax obligations, caution is advised in relying on the reports to determine inherent or contingent tax liabilities in Family Law property settlements. 

Cryptocurrency tax calculator reports may be useful in determining the income tax consequences arising from cryptocurrency trades however the reports are generic and not provided as a tax agent service.  Taxation of cryptocurrency and digital assets is an emerging area of tax law, advice on the inherent and contingent tax liabilities associated with cryptocurrency trades should be obtained from a registered tax agent or legal professional who specialises in cryptocurrency taxes.

It is essential advisers are aware of the basic underlying concepts of blockchain technology and the unique issues impacting on the identification and valuation of cryptocurrency and digital assets and the associated taxation consequences. 

For more information

If you or your clients require advice on the tax implications of cryptocurrency and other digital assets in Family Law disputes, please contact a member of the RSM Family Law services team.

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