Divorce, Death, Taxes and Digital Assets
How Life Events Affect Digital Assets
By David Parsons co-founder of TrustMe Property Exchange tpx-london.io
“Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes”. This quote is from US founding father Benjamin Franklin. A more modern version might include divorce, however most of these life events are certain. The legal systems surrounding these life events were developed before the advent of digital assets. Like the US constitution, digital assets are becoming a durable asset, unfortunately the legal and governmental systems need an update to support them.
We will explore these legacy systems provided by our legal institutions or governments to manage the transfer of wealth between generations and government taxing agencies.
Let's start the discussion with divorce. In certain American states, marital property is divided evenly among husband and wife. Both parties must fully disclose all assets, unfortunately due to the nature of digital assets being non-nominative, there is no name associated with these assets. The exception is if you are using a custodial service from an exchange e.g., coinbase. The exchange is actually holding your digital assets not you. This is the same as holding paper money under your mattress and not in the bank under a named account. No record of where or who owns the digital asset exists.
The nature of non-nominative digital assets appeals to certain spouses looking to avoid sharing their digital assets. When holding digital assets yourself in your personal wallet or under the proverbial mattress, you must provide the support mechanisms to manage your digital assets. These include: safely holding private keys, inheritance in case you die, notifying heirs if you die or become incompacitated. These are the primary responsibilities you must assume if assets are physically held by yourself.
The most prudent mechanism to handle digital assets when entering into or whilst you’re married is to provide a real time account of all your digital assets to your spouse. The declaration of ownership provides the relevant parties knowledge of your ownership so in the event of a divorce both spouses are cognisant of others assets.
As discussed earlier, if one of the spouses is ignorant of your possession of digital assets, there is no mechanism available to the legal jurisdiction to search or seize your digital assets. Your declaration is the only mechanism to establish ownership. Therefore, in divorce if one spouse fails to declare ownership, there is no effective mechanism to identify, recover or account for these digital assets. They become effectively judgement proof in any legal divorce proceeding.
In the United States, the very first question on your tax declaration is “Do you have cryptocurrencies”. The US, like other countries, is attempting to use the reporting nature of custodial digital asset exchanges such as coinbase to track cryptocurrencies. If, as stated earlier, you keep your digital assets in a personal wallet, there is no mechanism to associate your ownership with the assets. However, all of these assets in some jurisdictions such as the United States or England and Wales are protected by law for possession, however the law can not enforce ownership since no court can enforce a judgment upon these assets. No central authority exists to control ownership. This uncertainty therefore, creates questions as to whether they are unsuitable for long term taxation. Self reporting of digital assets such as the United States seems the only plausible long term strategy for taxing organisations.
As discussed above, one of the biggest concerns is where to store your digital assets. If you are not using a custodial service, the burden of storing your digital assets falls upon yourself. Some of the solutions require you to stamp your digital assets on a piece of metal. This becomes impractical if you have thousands of the assets. Every aspect of security must be attended to. It is the same as keeping a pile of cash under your bed. What happens if your house burns down ? What happens if your home gets burgled? What happens if there is flooding ? There is a cornucopia of scenarios that could befall your storage device of digital assets.
The legacy system for moving your assets to next of kin or your beneficiary is taken care of through the court system. In most countries there is an established system of apportioning your assets to your heirs. If you are using a custodial digital asset system there system is already in place to deal with death of the client. However, in the case where the person is keeping digital assets in a personal wallet, the case becomes completely different. One must deploy third party systems to report digital asset addresses and private keys to the designated heirs upon death. These are known as “Deadman” digital asset reporting services, they report automatically to designated heirs if you do not sign in after a predetermined time period.
In conclusion, divorce, death and taxes have been with us for a long time. The legal and tax systems have taken centuries to develop along with the associated system for the disbursement of estates after death. If you plan on using a personal wallet to store your digital assets, one must take care to put in place all of the mechanisms to support divorce, death and taxes legacy reporting systems. If you use custodial services such as coinbase, you do not. It is up to the owner of digital assets to decide what system to use and the associated dangers and advantages each brings.
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