If you’re already invested in cryptocurrency, you’re probably aware that Bitcoin’s value increased by 70 percent in 2021, and Ethereum jumped by 400 percent. You understand that cryptocurrency could be the next big thing for tech-savvy investors.
But what you might not know is how to adequately protect yourself and safely pass along this lucrative asset to your heirs. Because cryptocurrency is traded by wallet numbers, and not by names, your identity as the holder is kept private. However, a downside of this privacy is that no one comes to the rescue if you lose your wallet number or password. The lack of records means that a lost password could equal lost money.
In fact, that exact situation has happened to cryptocurrency owners. A number of owners have lost millions of dollars’ worth of cryptocurrency, and one accidentally threw away the key to half a billion dollars. Therefore, the first step to protecting your interests is quite a simple and obvious one: Store your wallet number and password securely.
With regard to estate planning, two primary considerations must be made with regard to cryptocurrency.
Cryptocurrency and taxation. The IRS considers cryptocurrency as property, rather than currency. It is therefore subject to capital gains tax when sold for a profit. 12 months is the threshold for determining whether the profit is considered a short- or long-term capital gain, and taxation is triggered when the cryptocurrency is exchanged for a different brand of cryptocurrency or exchanged for fiat currency.
Note: Cryptocurrency losses can also reduce an overall tax bill. This fact might help crypto holders to strategize their overall tax situation.
Care should also be taken to assess the impact that a cryptocurrency inheritance could have upon heirs.
Cryptocurrency and inheritance. A number of issues present themselves with regard to passing cryptocurrency to heirs. Primarily, an estate plan must set forth provisions allowing the fiduciary to access and manage digital assets. The holder might also wish to divide the currency between several heirs, or to offer comparable inheritances via other property such as a vacation home or life insurance payout.
Because cryptocurrency carries such massive potential for future gains, and because its security depends so heavily upon a single password, extreme care must be taken with regard to holding and transferring the asset. Meet with an estate planning attorney who specializes in the latest technology to investigate your legal options.
