As cryptocurrencies like Bitcoin, Ethereum, Ripple, and others increase in popularity and circulation in the economy, it is important to plan for the transition of cryptocurrency in your estate plan and the tax consequences of cryptocurrency. The IRS is paying more attention to these kinds of assets. The IRS treats cryptocurrency as property and an individual should use the fair market value of the cryptocurrency on the date the individual received it as the taxable basis. Individuals may make gifts of cryptocurrency to reduce capital gains taxes accruing on their holdings. Gifts of cryptocurrency should be treated for tax purposes as gifts of property, in which the donee receives the donor’s cost basis in the property. By donating appreciated cryptocurrency to qualified charities, the taxpayer can receive a charitable deduction on his or her income taxes for the gift and avoid paying capital gains taxes on the appreciation.
Unlike other financial assets, a trustee or personal representative fiduciary only needs the decedent’s passcode to access, invest, and distribute the estate’s cryptocurrency assets to the beneficiaries. This poses both convenience and risk. The fiduciary may not need a certificate of trust, death certificate, or letter of authority to control the cryptocurrency asset if the fiduciary has the passcode. However, should the fiduciary embezzle, make a mistake, or lose the passcode, the transfer would be untraceable and nearly impossible to recover. If the cryptocurrency is held by Coinbase or any other cryptocurrency transfer service, then the service will most likely have a beneficiary designation set up and will treat cryptocurrency like any other financial account.
It is important to include language in your estate plan permitting your fiduciary to access the digital records necessary to properly administer any cryptocurrency in the estate. It is generally recommended that an individual consider saving the passcode and storing it in a secure, but accessible location (or multiple locations). It is also important to select trustworthy fiduciaries who will properly manage the cryptocurrency and follow your intent. Contact the estate planning attorneys with Shinners & Cook, P.C. today to learn how you can preserve and protect your cryptocurrency assets and avoid adverse consequences in your estate plan.