Cryptocurrency hasn’t exactly gone mainstream, but it’s no longer a rare, fringe holding. A recent survey revealed that nearly 8% of Americans own at least some Bitcoin or other form of cryptocurrency, and another 7.76% indicated that they planned to purchase some in the future. That’s a fairly small percentage, but with hundreds of millions of adults in the U.S., the numbers aren’t small. Millions of people own cryptocurrency—and chances are good that much of it is at risk should the owner pass away or become incapacitated.
Cryptocurrency and Estate Planning
The characteristics that make cryptocurrency attractive to many people—privacy, and the fact that crypto exists outside the standard, government-controlled monetary system—also create challenges when it comes to passing the asset to heirs or providing for management of your cryptocurrency holdings if you should be unable to do so yourself.
As you know if you own Bitcoin or some other type of cryptocurrency, there’s no bank statement coming in the mail to tip off the administrator of your estate that you have those assets, and no place for him or her to present letters of administration and be granted access to your holdings. If you haven’t told anyone that you own cryptocurrency, it’s very unlikely that your administrator or your heirs will ever find out about it. And, knowing about it is no guarantee that they’ll be able to access it.
Retrieving and Transferring Cryptocurrency after the Owner’s Death
Methods for managing and transferring cryptocurrency vary, but they have one important thing in common: they’re technological, as opposed to legal or contractual. In fact, this presents a risk to crypto owners in their lifetimes, not just to administrators and heirs. For example, one type of cryptocurrency “wallet” resides on the holder’s personal computer. While this approach offers security benefits, it also means that if the computer’s hard drive is damaged, the currency may be forever lost.
The only way that an administrator or family member will be able to access crypto holdings after the owner’s death is with information about how to access the “wallet,” whether it resides on the owner’s computer or mobile device, allows for cloud-based access with the appropriate key, or employs a key-generation protocol.
Providing for Cryptocurrency Transfer in Your Estate Plan
As cryptocurrency continues to rise in popularity, some issuers may provide a system for passing holdings to a beneficiary after death. Today, however, it falls to the holder and his or her estate planning attorney to construct a system that will protect and transfer those assets.
Exactly how to manage this is best discussed with your estate planning lawyer. As a general rule, however, the most important steps are to:
- Make sure that your personal representative or some other trusted person knows that you own cryptocurrency and what type; and
- Devise a means of letting someone know how to access your crypto holdings while maintaining the security of your account.
One way to do this is to keep information about these assets, including the information necessary to access them, in a safe deposit box that will be accessible to your personal representative in the event of your death or incapacity. Depending on the system employed, you may also need to ensure that your representative has access to your computer, mobile device, USB device, or other physical equipment necessary to follow the protocol for accessing your
Cryptocurrency and Taxes
Taxation of cryptocurrency is complicated. The Internal Revenue Service (IRS) generally treats it as property, making it subject to capital gains tax. But, the dual role of crypto as property subject to capital gains taxation and currency traded for goods and services can make it difficult to determine the appropriate basis for the asset. And, neither you nor your estate will be receiving a 1099-B or other neat statement of gains.
Talk to an Estate Planning Attorney about Your Cryptocurrency Holdings
If you own cryptocurrency and fail to plan specifically for its transfer, it could become forever inaccessible upon your death or incapacity. Protect your interest and those of your beneficiaries by working with an experienced estate lawyer to provide for disposition of your crypto holdings.