(Digital) Money Matters – Why You Need to Account for Cryptocurrency in your Estate Plan

Though you probably can’t use them to buy groceries or a pair of jeans from Amazon, cryptocurrencies, if you happen to own them, merit careful consideration during the estate planning process. With the recent spike in value for select cryptocurrencies, making sure your digital assets are properly managed and able to be transferred in the case of a life-altering event has never been more important.

 

What are some examples of cryptocurrencies?

First developed in 2009 and currently trading at upwards of $7000, Bitcoin, a worldwide cryptocurrency and digital payment system, has dominated the vast cryptocurrency market. The transaction involved in bitcoin transfers occurs directly between payer and payee, without an intermediary; there is no physical representation of the currency and there is no central bank that regulates or processes transactions. Owners of bitcoin are issued a “wallet,” that contains the two required components for a transaction to occur: the bitcoin address and the private key one must enter to effectively transfer money to a different address. Unlike physical currency, ownership of bitcoins is not linked to a person, but a digital entity with a unique public address. Moreover, in a transaction, bitcoins are transferred from one address to another, and all transactions are recorded in a public ledger called a blockchain. Since its inception, competing cryptocurrencies such as Litecoin have also entered the market hoping to acquire some market share. Like Bitcoin, Litecoin is a digital, peer-to-peer cryptocurrency unmanaged by any central authority. Unlike Bitcoin, however, Litecoin claims to have almost zero payment cost and authorizes transactions almost four times as fast as Bitcoin. Released in 2011, Litecoin reached a market capacity of $1 billion in November of 2013 and over $2 billion by August of 2017.

 

How do I properly transfer my cryptocurrencies?

 

Similarly to other appreciating assets which you may own, such as a house, it is best to have a plan in case the worst ever comes to fruition. The same applies to cryptocurrencies, especially considering the unprecedented growth they’ve experienced in the last several years. Unlike real estate, digital currency cannot be transferred through a written will, and therefore it is essential to understand the necessary steps involved in planning the transfer of these assets.

With regard to estate planning, there are three fundamental steps for the effective transfer of Bitcoins: making beneficiaries knowledgeable of the assets, supplying them with the necessary means to access those assets, and keeping in mind the issue of relevant taxes when beneficiaries inherit them.

 

Step 1: Increasing Awareness

 

The first step is generally applicable to estate planning, regardless of the type of asset in question. If you wish to transfer real estate or other assets to friends or family, you need to inform them of the assets’ existence and of your current ownership over them. The same is especially true of digital assets, because the process of retrieving them is specific to cryptocurrency. Without a proper plan in place, you run the risk of easily losing valuable assets, so it is important that all potential beneficiaries are aware of their existence.

 

Step 2: Guaranteeing Access

One of the biggest challenges with transferring ownership of these digital assets is inherent in the anonymity of cryptocurrency. There is no central administration that overlooks or manages transactions, and therefore, the only individuals that can access Bitcoin assets of a deceased loved one are those with access to the information contained in the person’s Bitcoin wallet. Though a will cannot be used to transfer cryptocurrency, a written document can certainly be used to provide detailed instructions to loved ones on how to access an owner’s wallet. A similar option entails making copies of a wallet and distributing them to beneficiaries, who should, in turn, keep the entrusted document in a safe or another similarly secure location.

If you wish to distribute your assets among several beneficiaries, you can create a multiple-signature account that would require at least two private authentication keys to access them, and give a copy of your wallet to each beneficiary.

 

Step 3: Accounting for Taxes

As with all financial matters, the government will always be a supervising entity, especially when it comes to cases where taxes may be owed. Considering that the United States government once charged the creator of Bitcoin with developing a competing currency to the dollar, you can rest assured that the IRS has found some way to wet its beak in the inheritance of privately owned digital assets. In 2014, the IRS declared that cryptocurrency will not be treated as currency, but as property, for federal tax purposes (IRS Notice 2014-21). As a result, during a transaction, individuals are required to recognize ordinary or capital gains (or loss) between the current Fair Market Value (FMV), and the FMV of the assets at the time of purchase. When receiving payments via cryptocurrencies such as Bitcoin, payees must also report the respective receipts as gross income. A perk, or rather something that eases the tax burden of inherited cryptocurrency, is that upon inheritance, beneficiaries can be subject to lower capital gains taxes since the original value of the assets is readjusted to the market value upon inheritance (in the case that the assets have appreciated.)

Like with physical property, you may be able to further reduce your tax burden by placing your digital assets, such as cryptocurrencies, by placing them into designated trusts to transfer their ownership before your passing.  

 

If you happen to own intangible assets like Bitcoin, you need to make sure that you have an effective and detailed plan that will aid your loved ones in inheriting the assets in case the unthinkable happens. Given that the process of transferring digital currency is rather unconventional, it is important that you leave any intended beneficiaries with the necessary information to access your cryptocurrency, and plan wisely to reduce the tax burden on their shoulders.

When engaging in estate planning, it is highly recommended that you consult with an experienced estate planning attorney. For professional assistance in this matter, contact The Law Office of Inna Fershteyn and Associates, P.C. at 718-333- 2394 or visit our website and schedule your consultation today.

 

Eleanore

Eleanore

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