Critter Corner: Estate Planning for Cryptocurrency

Dear Angel,

A couple years ago, I started investing in Bitcoin. It’s value has increased a lot and I want to include it in my estate planning. What should I know when it comes to developing an estate plan for cryptocurrency?

Bitt Coyne

Dear Bitt,

Currently, 46 million Americans own the most popular of cryptocurrencies, Bitcoin. Last year alone, Bitcoin’s value increased by 440%, so developing an estate plan to include cryptocurrency, such as Bitcoin, is a wise idea!

How to Plan for Cryptocurrency

Document the “Private Key” and Note it in Your Estate Planning

One of the first things to think about when establishing an estate plan for cryptocurrency is documentating the cryptocurrency’s location and passwords or “private keys.” cryptocurrencies are typically stored in one of four ways:

an online exchange (custodial wallet);
a hardware wallet;
a mobile wallet; or
a local software wallet.

Regardless of choice of storage, access to the cryptocurrency is controlled by the private key, which is great protection because it is almost impossible to hack. Unfortunately, if you lose, misplace, or forget your personal private key, your cryptocurrency is completely inaccessible; and not even the cryptocurrency exchange can recover your key. So be sure to make note of this information and include it in your estate planning.

Communicate Where Your Cryptocurrencies are Held and How to Access Them

Next, be sure to communicate in your estate plan where your cryptocurrencies are held and how to access them. If necessary, your fiduciary should be granted specific power to access digital assets and online accounts. The estate planning documents should outline to whom the asset shall pass and possibly select a special trustee who is familiar with this type of asset to manage these assets. Due to the nature of informing the fiduciary about the private key information, very careful consideration is needed when choosing a trustworthy person.

Track Cryptocurrency Carefully for Tax Purposes

Finally, the IRS considers cryptocurrency to be an asset. Therefore, careful consideration needs to be given when it comes to taxes that will be due on its sale. Keep in mind that the fair market value of cryptocurrency is set by conversion into U.S. dollars at “a reasonable exchange rate” and transactions involving cryptocurrency are subject to the capital gains tax regulations.

Under current law, if beneficiaries receive these assets as part of an inheritance, then the cryptocurrency (just like other assets such as real estate and stocks) may receive a “step up” in basis, erasing any lifetime capital gain appreciation.

Protect Your Cryptocurrency

Cryptocurrency, like any other asset, requires protection. Without careful planning and routine updates with an experienced estate planning attorney, any wealth from your cryptoassets can be lost.

Hope this helps!


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About Renee Eder

Renee Eder is the Director of Public Relations for the Farr Law Firm, and gives the voice to the Critters of Critter Corner. Renee’s poodle, Penny, is an official comfort dog who she and her children bring to visit with seniors who are in the early stages of dementia at a local senior home once a month.