Bitcoin in family cases. An asset to form part of the pot?

The “bitcoin” currency came into existence in 2008. With digital currency beginning to acquire legitimacy of traditional assets (as bitcoin are now worth substantially more than their nominal value in 2008) these assets must not be overlooked. There are however tax and disclosure implications to be considered in family cases.

It is right to consider bitcoin as an asset, capable of forming part of the pot of assets. This asset is, like any other asset, to be reviewed as part of the overall financial relief case, to which Section 25 of the Matrimonial Causes Act 1973 will be applied.

There have been numerous articles, blogs and information in the press and online regarding bitcoin. However, these currencies are still somewhat misunderstood and could cause problems in financial proceedings and financial family disputes if ignored.

Bitcoin is a currency referred to as “cryptographic currency” and is a digital asset that offers a means of transferring money outside of the central banking system. It is maintained on a self-regulatory database called the blockchain, which records all of the bitcoin and other cryptographic transactions. The database or ledger is distributed, meaning that copies of the transactions are made independently. The transactions are securely and accurately stored on a decentralised network without the need for a central authority, with the benefit that the blockchain is less prone to data manipulation.

Bitcoin can be purchased from a variety of exchanges such as Coinbase and Binance and can also be used for payments as it has a value. The value primarily derives from its functionality and fixed supply. There are currently around 17 million bitcoin in existence with a total mineable bitcoin of 21 million. Bitcoin mining is a process that encourages an individual with access to the internet and appropriate hardware to verify bitcoin transactions made by other users for a fee which are then added to the public ledger. A bitcoin is currently worth just under £5,000 at present.

Since bitcoin, there have been other applications created on the blockchain and used to pay out different currencies known as “altcoins” which have many similarities to bitcoin. A list of these can be found at www.coinmarketcap.com. Essentially bitcoin is a reward which can be used as a currency or traded like a share on the stock market and there are various specific exchanges which are used for trading bitcoin and other altcoins.

Trades and transfers of bit/altcoins are public and traceable if you know the public key of the individual's wallet which holds the bitcoin. The bitcoin is held in a wallet with a private key (like a pin) and has a public key (like a bank account number). The public key will reveal all of the trades and are traceable on the public ledger, therefore if you have concern that a spouse or former partner may be hiding funds in cryptographic currencies, you will need the public key to investigate further. This will enable you to review what has been happening in that specific wallet, which, in turn, will enable you to raise questions. This type of review will allow a person to review internet search history for cryptographic - related activity. This area of disclosure is akin to requesting the bank statements of a spouse or former partner as required for example by a Form E.

As bitcoins and altcoins are assets and we have seen, bitcoin in particular, increase in value over the last 10 years, what is uncertain is whether or not individuals will have to pay tax on sold coins. If we look at the theory of CGT, in the event someone bought a coin for a low price and then sold or traded that coin for significantly more, one would expect capital gains would apply to the difference. The guidance given by HMRC is vague. Most likely because trading with this currency may well be deemed “highly speculative”. A transaction could be considered so highly speculative that it is not taxable and it could follow that any loss would not be relievable for CGT purposes.

Until HMRC has updated its guidance (last updated in 2014), there could be a risk of a person receiving a hefty tax bill if it is not accepted by HMRC as being a speculative gain. The impact of this may be significant for people that trade in cryptographic currencies.

Specialist advice will be required. If you have any questions regarding bitcoins upon divorce or separation please contact one of our specialist family lawyers.