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How to Address Cryptocurrency in Your Estate Plan

January 11, 2024

Cryptocurrency is still in its infancy but has become increasingly mainstream over the last few years. As a result, more people have to address cryptocurrency in their estate plans. If you have a meaningful amount of cryptocurrency or other digital assets, such as NFTs, there are several unique issues to consider. The same benefits of cryptocurrency that make it appealing as an investment (i.e. security, blockchain, etc.), also present some unusual concerns when it passes to another person after you die.

Succession Planning for Cryptocurrency

As with any asset, you can gift cryptocurrency and/or leave it to your heirs/beneficiaries in a will or trust. However, proper succession planning has to take into account that if you, as the only holder of the passkey or access code pass away, the assets may be lost forever. It is important to plan for how your beneficiaries will access your cryptocurrency assets after you pass.

Securing Your Passkey

It is not enough to state who gets your cryptocurrency in your will or trust. You must provide instructions and access information to the trustee/executor/beneficiary of the cryptocurrency. Security concerns are paramount as the holder of the passkey essentially is the owner of the cryptocurrency because there is presently  no way to register ownership of cryptocurrency.

The solution to this problem is to plan ahead. It is essential to discuss cryptocurrency assets with the person(s) who will be taking control of them. That individual must understand how to take possession of your crypto wallet (digital or hardware). In addition, to keep the cryptocurrency from falling into the wrong hands, you should consider options for safe and secure ways to provide the needed passkey or other access code. One way to do that is to have a physical piece of hardware that contains the passkey but is only accessible by using a PIN code. The hardware is stored in a secure location which the trustee/executor has knowledge of and will be able to access. The PIN is held by another person who will provide it when the authorized person requests it. This two-step process adds a layer of protection to your assets.

Selecting a Fiduciary

The volatility of cryptocurrency and its unique nature can make it difficult for fiduciaries to manage it. Accordingly, you must carefully consider the selection of a fiduciary who is capable of navigating the cryptocurrency market. You want someone who understands how to both access, monetize and continue to invest your cryptocurrency. 

Tax Considerations

Cryptocurrency is subject to taxation under the same rules that apply to other assets. However, cryptocurrency volatility can be used to your advantage if you gift it when the value is low. This removes any future appreciation from your estate and thus reduces potential estate taxes after you die. 

Importantly, cryptocurrency sales or exchanges trigger capital gains taxes for the seller / transferor. That includes using cryptocurrency to buy physical assets such as a car, or even a cup of coffee. Such transactions are reportable tax events. 

Cryptocurrency obtained as compensation will normally be taxed at ordinary income tax rates. Similarly, cryptocurrency received as consideration for a transaction will be taxable in the same way as a cash payment would be. 

You should ensure that your accountant is comfortable and familiar with cryptocurrency to minimize the risk of problems with the IRS.

Estate Planning Strategies for Cryptocurrency

Creating an estate plan that maximizes the value of cryptocurrency assets to your beneficiaries and minimizes the tax burdens can be accomplished much the same way it is managed with more traditional assets that have similar price volatility. Our attorneys have worked with clients with substantial cryptocurrency holdings to craft effective strategies to protect their existing wealth and grow their holdings. Contact us for a comprehensive review of your estate plan to ensure it meets your needs and goals.

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