Cryptoassets in relationship breakdowns

On relationship breakdown, the financial remedies available to the separating couple are regulated by different legal regimes, depending on whether they were married or civil partners, or parents.

Divorce and civil partnership dissolution: on a divorce or civil partnership dissolution, the court has a wide discretion to make a fair and reasonable financial award. The parties have a duty to disclose assets held worldwide.

Unmarried parties: an unmarried couple can only bring financial claims against the other if they can establish a proprietal interest in an asset, using property law or trust principles.

Unmarried parents: an unmarried parent can bring additional claims if in the interests of their children.

In this article, we will concentrate primarily on a couple who are married/in a civil partnership, although the general principles regarding disclosure apply in any of the above scenarios.

What are cryptoassets and why do they cause complexity?

The very nature of cryptoassets (also called cryptocurrency — the terms are used interchangeably) can cause significant issues on relationship breakdown if the party holding the assets is not prepared to deal with matters transparently and openly.

Secrecy and anonymity

Part of the appeal of this technology is its security and anonymity. Usually, the files are created using the same methods as cryptography (the science of hiding information).

Take Bitcoin as an example. Bitcoin is stored in a virtual wallet, and this virtual wallet has two keys — a public key and a private key. The public key is just a string of characters and is visible to anyone as an address for sending and receiving cryptocurrency, whereas the private key is what allows the owner to access the wallet’s contents.

Intangible assets

Cryptoassets are intangible and could be held anywhere in the world. By their very nature, they are more obscure than almost all other assets or investments. Access to records may be very difficult to establish. In financial remedy proceedings, the very existence of any asset may be uncertain and hard to ascertain.

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.

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.

What steps need to be taken?

Cryptoassets must be identified and located as quickly as possible.

Failure to disclose

Although failure to disclose may result in penalties being imposed on the non-disclosing party — which could include imprisonment in some circumstances — the reality is that in many cases, it can be vital to secure the asset and keep it ‘safe’ until a financial settlement is awarded by the court.

Worldwide freezing orders

If there is a real risk that an asset may be moved out of reach, the court does have the power to make freezing orders over investments in digital currencies if necessary. However, to secure a freezing order, one needs to know the identity and location of the asset sought to be protected. It may be necessary to get expert help from a forensic accountant to help establish an evidential trial to find the assets.

A word of warning

The Court of Appeal has confirmed that there is a fundamental right to privacy and confidentiality between spouses, both prior to or after a breakdown in their relationship. It is unlawful, to take, copy and keep copies of confidential documents even if you think your spouse or partner may be trying to hide assets. It may also arise in civil or criminal prosecutions, or leave you unable to instruct your chosen legal team. As such, we strongly recommend taking legal advice before taking any steps to access to documents and computers belonging to your spouse or partner.

Inability to locate cryptoassets

If, having exhausted all options, establishing the location and value of the precise cryptoassets remains elusive, with sufficient evidence, it is still possible to persuade a court to infer that the resources are available and factor them into a settlement.

The non-disclosing party will also severely damage their own credibility and prospects of the judge exercising their discretion to their advantage.

Obtaining confidential information for cryptoassets

Although care needs to be taken in obtaining confidential information belonging to another party, as highlighted above, the following can prove invaluable:

Paper trail

Is there any evidence of funds moving to or from more conventional investments, such as bank accounts, to initially fund the cryptoassets or make any further transactions?

Social media/emails

Are there any records of discussions taking place before the relationship breakdown, to evidence a proposed or actual purchase? Are there emails, texts, WhatsApp messages and so on?

Passwords

Who might hold information about passwords for the investments?

Third parties

Were any third parties involved in the discussion and what evidence might they be able to provide?

Tax reporting obligations/tax or estate planning advice

Did the non-disclosing party pay tax, or seek tax or wills/estate planning advice before or after acquiring the assets and from whom? It is probable that they may have completed tax returns to report any earlier disposals. It may be possible for a court to order the release of papers or files.

Expert evidence

Consider whether it might be of value to appoint a forensic accountant to help you piece transactions together.

How can the courts deal with cryptoassets in divorce?

The court has various options available, including the sale or transfer of the asset. However, if a party is unwilling to co-operate, whether the enforcement options are realistic needs to be considered and other options may need to be pursued.

Additionally, If unable to establish/evidence a cryptoasset at the time of a financial settlement, if it later transpires that there was such a resource, it may be possible to reopen the case and set aside the original order. A new financial order would then be made.

Capital Gains Tax on divorce or dissolution

Separating spouses or civil partners are given up to three tax years after the tax year that they stop living together in which to make a ‘no gain, no loss’ transfer of assets for CGT purposes (although this time period ends earlier if the court pronounces the final order or decree absolute).

For example, if the couple separate on 22 August 2026, the ‘no gain/no loss’ rule will apply to any transfers made until 5 April 2030 (or the date of divorce if earlier).

This is effectively a relieving provision. It does not avoid tax on any later disposition of the relevant assets transferred between the spouses or civil partners or former spouses or civil partners as the acquiring spouse or civil partner inherits the base cost/acquisition value of the disposing spouse or civil partner. It is therefore a practical and logistical tool ensuring that a chargeable disposal for CGT is not triggered as a result of financial arrangements on divorce or civil partnership dissolution.

The ‘no gain/no loss’ rule continues to apply to assets (including cryptoassets) that separating spouses or civil partners transfer between themselves with no time limit, so long as it is part of a formal agreement (known as a consent order) within divorce or dissolution proceedings, that is approved by the court or via a court order made within financial remedy proceedings.

The position can therefore be summarised as follows:

• Dispositions between spouses or civil partners of any capital assets in the tax year of separation or in the three immediate tax years following separation (no longer living together), will not trigger a CGT liability; and
• Any dispositions between spouses or civil partners of capital assets that are as a result of a court-approved order will not trigger a disposal CGT purposes at any time in the future (even if this is more than three tax years after the tax year that they stop living together), as long as the disposal is pursuant to that order.