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Tuesday, May 8, 2018

What Happens to Cryptocurrency When Its Owner Dies?

Cryptocurrency and Estate Planning

Bitcoin, Litecoin, Ethereum, Zcash, Dash, Ripple, Monero… these aren’t just a bunch of made-up words, they are the most popular forms of cryptocurrency. They are a making waves in the financial world and creating interesting challenges for estate planners.

If you die with a shoebox of cash hidden in your closet, or with money in a traditional bank account, or owning a piece of property, how those assets will be treated is pretty straightforward. The government will take out the appropriate taxes, then the asset will pass on to someone else as specified in your estate plan. What happens if you own cryptocurrency when you die is much more uncertain.

Cryptocurrency is a completely intangible asset. It is transferred by following a technological process, not by signing legal documents. And those who are buying cryptocurrency on an exchange do not always have to reveal their true identity to the sellers. These characteristics make it somewhat challenging to transfer virtual currency via traditional estate planning techniques.

Unlike traditional banks, virtual currency exchanges do not require account holders to designate someone who can take over the account upon its creator’s death. This means an account holder’s heirs would have to go to court and establish their right to take over the account through the probate process. However, even securing the right to take over an account does not ensure access to the account’s contents or an ability to control the account.

There is no way for a court to force an exchange to open a crypto wallet for an heir. Therefore, cryptocurrency owners must provide the documentation needed for their heirs to access and control their accounts, in addition to granting permission for such access and control. Ideally, cryptocurrency holders will carefully document what virtual currency they own, how much they paid for it, and when they bought it. But it is also critical to provide the technical instructions and virtual keys necessary to take over the account. This information could be written on a piece of paper or stored on a USB drive that is kept with other estate planning documents in a secure location.

It is also important to note that owning cryptocurrency can have significant tax implications. Cryptocurrency is treated as property rather than currency for tax purposes. Therefore, capital gains and losses tied to cryptocurrency must be reported, and taken into account during the estate planning process. Bitcoin owners who bought in early and made a killing when the value of the virtual currency skyrocketed, should be aware that they will owe a significant amount in capital gains taxes if they trade, sell, or spend their Bitcoins, or if they die. This could change if the IRS starts treating virtual currency like actual currency, but for the foreseeable future, it is going to be treated like property.

Working with an estate planning attorney who understands what cryptocurrency is and what unique challenges it presents is critical. If your estate plan is not structured to facilitate the transfer of digital assets, any value your assets have accumulated could evaporate into the ether, or you could wind up paying an arm and a leg to Uncle Sam in capital gains taxes.


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