In this article, we will discuss cryptocurrency and estate planning, and answer the following questions:
A small but growing pool of individuals are including at least one cryptocurrency in their investment portfolio. Whether it be someone buying purely out of curiosity—hoping that it might skyrocket one day—or a hardcore cryptocurrency aficionado, both will need to consider what will happen to their investment/digital asset when they die. Is estate planning for cryptocurrency as convoluted as buying bitcoin was in the early days? Thankfully, with a little work and some future-proofing, your cryptocurrency is easily transferred to your beneficiaries.
As of writing this, for tax purposes, the IRS classifies cryptocurrency as personal property. It still has a fair market value, much like a house, car, or painting, but it’s not treated the same as money sitting in a bank account. Does this mean that you can get around the Gift Tax by gifting someone cryptocurrency versus fiat currency? Possibly. But if the recipient wants to actually use that cryptocurrency to purchase something or pay off a loan, they’re probably going to have to sell it. At that point they will be taxed. However, cryptocurrency is inherently more anonymous, and thus harder for the IRS to track if not sold at some point for fiat money. While the total value of your assets impacts your estate tax (if it’s high enough), cryptocurrency being classified as personal property, doesn’t have much bearing on it’s transfer to your beneficiaries.
One big difference between cryptocurrency and fiat money held in a bank account is that cryptocurrency doesn’t have a beneficiary designation attached to it like nearly all other types of financial accounts. What this means is that if you die without assigning a beneficiary in your estate planning, your cryptocurrency is at risk of dying as well. This is especially true if you failed to write down or give instructions to anyone else on how to access the cryptocurrency. There is no one to call at Bitcoin or Ripple headquarters to reset login credentials.
Some will want to keep the fact that they own cryptocurrency hidden from the general public for privacy or anonymity reasons, but there must still be a way for the representative or executor of your estate to access the currency to administer it to your heirs. Conversely, you could just list it under your personal property, name the individual to receive it, and give that person the information they need to access the cryptocurrency before you die. You don’t have to list the value of the cryptocurrency in your documents because it is constantly changing. If you feel the need to be thorough, you can list the number of currency units, such as “three-thousand bitcoin,” but you could just as easily describe it as an asset to be divided based on your wishes. You could also direct the representative to provide the beneficiary of the crypto with a sealed envelope containing the directions. Generally, whoever will take care of your cryptocurrency after your death, that person needs to be knowledgeable in the what/why/and how of cryptos.
If you do nothing to give others access, then no one will. In fact, the state won’t even be able to get at your cryptocurrency to divide amongst any living heirs or your spouse if the access information died with you.
You will need to create a memorandum that contains the information to access the cryptocurrencies. This memorandum can be easily updated without all the hassle of updating a will or trust and it can be included with your other estate planning documents. Information that should be covered in the memorandum includes:
It’s also advisable to create a “How-To” guide for accessing your cryptocurrency, especially if the beneficiary has little knowledge on the subject. Because there are so many cryptocurrency wallets, devices, and storage options available, just having the username, password, keys, and links may not be enough to allow another person to access the asset.
If your beneficiary plans to hold onto your cryptocurrency long-term, the tax implications won’t be felt until he or she decides to sell or trade the cryptocurrency. However, if the cryptocurrency is converted to cash following your passing, it must be declared as income on an estate tax return. Even if a crypto like Bitcoin is held for a period and then sold, there is still the issue of the capital gains tax. Residents of the U.S. must report Bitcoin trading losses or gains on their tax returns. Issues may arise if the trustee or representative of your estate has to sell your cryptocurrency to pay down debt or if one or more heirs intends to immediately sell their share after your estate is closed.
Beneficiaries need to understand that selling a cryptocurrency they’ve inherited is much the same as selling a stock or real estate. It will be sold at the fair market value price and the difference between that price and the value of the cryptocurrency when it was transferred to the beneficiary is what they will be taxed on. For example, if Bob receives two-hundred Bitcoin valued at ten-thousand dollars and then sells them three months later when they are valued at ten-thousand-one-hundred dollars, the taxable gain on the Bitcoin is twenty-thousand. Cryptocurrency tax laws are still new and sometimes confusing. It’s highly suggested that you speak with an attorney and accountant who specialize in this sort of thing.
O'Flaherty Law is happy to meet with you by phone or at our office locations in: