How are cryptoassets taxed on divorce or dissolution?

Cryptocurrency and tax in divorce and dissolution settlements

Cryptocurrency assets present a number of challenges in the context of divorce, the principal ones being:

• valuation; and
• tax treatment.

Tax treatment

HMRC acknowledges that, from a tax perspective, “the evolving nature of the underlying technology and the areas in which cryptoassets are used” means that the tax treatment is also evolving and there remain some areas of uncertainty.

In such a rapidly evolving environment, even defining what cryptoassets are can be difficult, but HMRC defines as:

“Cryptographically secured digital representations of value or contractual rights that can be:

• transferred;
• stored; and
• traded electronically.”

Importantly, HMRC does not consider cryptoassets/cryptocurrency (the terms are used interchangeably) to be currency or money for tax purposes, in relation to which there are existing and established tax rules, but instead confirm that the tax treatment of cryptoassets depends upon their nature and use.

Cyptocurrency and Capital Gains Tax

For most individuals, cryptocurrency (such as Bitcoin, Ethereum and XRP) is held as an investment in the hope that it will increase in value or be used to make certain (primarily online) purchases. As with other assets, Capital Gains Tax will therefore normally be payable on any “gains” realised on the disposal of such cryptoassets — disposal for these purposes including where it is sold, gifted, exchanged or used to pay for goods and services.

As with the disposals of other assets, any gift or transfer of cryptocurrency between connected persons is deemed to take place at market value.

Capital Gains Tax on divorce or dissolution

Transfers during the tax year of separation

In the context of a divorce or dissolution of a civil partnership, if the married couple/civil partners have lived together during a particular tax year prior to separation (which is likely to be permanent), any transfer of assets (including cryptoassets) that is made between them before the end of that tax year (“the tax year of separation”) is treated as taking place at no gain/no loss, as would be the position if they were married, so the main area of contention will be valuing the relevant cryptoassets for the purpose of the financial settlement.

Transfers after the tax year of separation

For transfers on or after the 6 April of the tax year of separation but before the decree absolute/final order, the parties are considered to connected parties for CGT purposes until the date of decree absolute/final order, meaning that any transfer of cryptoassets will be deemed to take place at market value, whatever price (if any) is actually paid. Therefore, if the cryptoasset has risen in value, CGT will, subject to any applicable annual exemption, reliefs or losses, be payable by the transferring party.

For transfers after the decree absolute or final order, the tax implications of that transfer will generally be based upon the actual consideration rather than market value (unless the transfer is not at arms-length, which would include any gift, in which case the market value rules would apply).

Valuations

In terms of valuation, many cryptoassets (such as Bitcoin) are now traded on exchanges so a value can be established (although these will largely be overseas exchanges and so not denominated in pound sterling and will therefore need to be converted at the appropriate exchange rate).

The volatility of the price of cryptocurrency (think of the recent Bitcoin bubble) can lead to wildly different valuations from month to month and even day to day. This means that assessing the value of the assets for the purpose of the financial settlement and the tax implications on any transfer (if not taking place at no gain/no loss) are extremely difficult.

In such an emerging and rapidly evolving sector, this position is unlikely to change in the near future and therefore specialist input and advice will be needed in situations where the value of any cryptoassets held by the parties are material.