Estate Planning for Bitcoin and Other Cryptocurrencies

Globally, some 221 million clients have cryptocurrency accounts. Cryptocurrency is a type of virtual currency defined by the Commodities Futures Trading Commission as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”

Cryptocurrencies use cryptography to validate and secure digitally recorded transactions on a distributed ledger, such as a blockchain. Blockchains house financial transactions without the intervention of banks, governments, or other third parties. Bitcoin, created in 2008 and first offered in 2009, is the market leader in cryptocurrencies, which today number in the thousands. A recent poll calculates 11% of Americans are cryptocurrency investors.

Real Ways to Bequeath Your Virtual Currencies

Estate planning is a must to ensure your digital assets are passed on to your beneficiaries. The following advice also applies to your accounts with PayPal, Venmo, and similar payment platforms.

Since cryptocurrencies exist digitally, account owners must provide clear instructions to their heirs describing how to access the accounts. Unlike banks or brokerage firms, where beneficiaries can present documents authorizing their right to a decedent’s account, no similar infrastructure exists in cryptocurrencies. Rather, heirs must have the proper username, password, and, in most cases, digital application. Without that information, the account is inaccessible.

As noted, usernames and passwords are key. Make sure the data is easily available: for example, you can leave an electronic note in a file on your computer (assuming your heirs have your computer password) or handwrite the information on a letter. Place the letter with your will and other important papers in a secure place, like a safe or a fire-proof box.

Other Options: Trusts or Liquidating Accounts

Cryptocurrency can be left in a trust. Trusts are not subject to probate, and trust documents rarely become part of public records. Or, if accessing your accounts may be too complicated for your beneficiaries, you can write a memorandum for your executor to convert your cryptocurrency to legal tender on your heirs’ behalf. Our experts at Carolina Family Estate Planning can assist you in setting up a trust or administering your cryptocurrency accounts for your beneficiaries.

Where Do You Keep Your Digital Wallets?

Typically, cryptocurrency accounts are held in applications or programs known as “digital wallets” stored on electronic devices. Whether your digital wallet is located on a phone, computer, or another device, provide information on where the device is and how to open it.
Your beneficiaries may be unfamiliar with cryptocurrency – leave detailed instructions on how to use it. You might want to walk your loved ones through the process before you pass away so they have a better idea of digital access procedures.

Don’t List Passwords in Your Will

Remember, anyone who has your password can use it to open your accounts. Avoid including passwords and usernames in your will (a public document). Unscrupulous people are known to comb through public documents in order to commit identity theft.

One insurance firm estimates that to date, 4 million Bitcoins, worth billions of dollars, have been lost because their owners or heirs cannot access the blockchain. Keep your cryptocurrency accounts protected now and for your heirs. Carolina Family Estate Planning can help you get your ducks in a row by reviewing a checklist of necessary steps. We can also retain copies of your records and documents.

Real Taxes on Virtual Currency

Some virtual currencies, like Bitcoin, can be exchanged into fiat money (U.S. dollars, Euros, etc.). This type of currency, referred to as convertible virtual currency, can be sold, exchanged, and used to pay for goods and services. The Internal Revenue Service (IRS) considers convertible virtual currency to be taxable.

Federal tax regulations require taxpayers to maintain records to support their tax returns. Keep records of receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency. This information will be helpful to your beneficiaries.

Take Charge with the Help of Our Estate Planning Attorneys in Cary, NC

To combat crimes and money laundering, the U.S. Department of Justice launched a national cryptocurrency enforcement team in October 2021. Laws governing fiduciary access to digital assets are under discussion in many states. Talk to Carolina Family Estate Planning’s legal team about securing your estate’s cryptocurrency accounts for your beneficiaries. At Carolina Family Estate Planning, we help families build better lives by planning for a secure future via estate planning, asset protection, and long-term care planning. Call us today at 919-443-3035 to schedule a needs assessment call. We’re here to help.

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.