Bitcoin is the most common type of cryptocurrency used today; however, it is important to understand both the benefits and challenges when it comes to Bitcoin and estate planning. For security purposes, Bitcoin uses cryptography which makes it presumably invulnerable to manipulation or government interference. While there are tax advantages because Bitcoin is treated as an asset by the Internal Revenue Service (IRS), there can also be disadvantages given the extreme security and privacy of Bitcoin wallets. Considering the complexities of cryptocurrency, you may want to speak with a knowledgeable estate planning attorney at The Law Office of Aubrey Carew Sizer PLLC at (571) 403-2619.
How Bitcoin Operates
Bitcoin operates on a "blockchain," which is a ledger technology shared by cryptocurrency owners. At its most basic, a blockchain is a database that electronically stores information collected on a computer system. This database makes it possible for countless numbers of users to access and utilize their own accounts simultaneously. Information is collected in blocks; when the storage capacity of a block is reached, a new block is formed and linked to previous blocks, thereby creating the blockchain. Thus, the data contained in the Bitcoin blockchain is the complete history of all transactions, which cannot be reversed or altered by any node (computers comprising Bitcoin's network). Blockchain technology is extremely secure; however, describing it in its entirety would require much more space than is available here.
Specific planning is essential to ensure your cryptocurrency assets and property are distributed according to your wishes upon your death. A Bitcoin wallet is accessible with a private key, however, if the fiduciary does not have access to that private key, it can be problematic. Survivors of loved ones who have passed often have no idea that the deceased owned Bitcoin, and those survivors that do have knowledge of cryptocurrency holdings may not be able to locate or access the account. As a virtual asset, Bitcoin wallets may be stored on a computer hard drive, phone, USB thumb drive, or anywhere data can be stored. The account owner's private key is the only way to access the virtual asset or perform transactions.
Basic tips for incorporating Bitcoin into an estate plan:
• Discuss Bitcoin with a knowledgeable estate planning lawyer
• Make certain the trustee or executor understands how to access your Bitcoin wallet
• In order to know the tax basis of Bitcoin assets, you will need to keep clear records of purchases made with the crypto
• Share the fact you have Bitcoin assets with your financial advisor, CPA, and attorney as the executor of the estate will talk with these people first following your death
• Include in your Last Will and Testament or a document included with it that you own a Bitcoin private key
Bitcoin is anonymous, so if survivors do not know the deceased had an account, it will die, too. In addition, bitcoin accounts do not have beneficiary designations like checking or savings accounts do.
According to The American College of Trust and Estate Counsel (ACTEC) Foundation, one possible way to ensure Bitcoin beneficiaries have access to an account is through an M-of-N (minimum number of agents out of total number of agents) transaction system. With this system, a minimum of three individuals are given the authority to approve a transaction, with only two of those individuals' approval necessary to uphold the transaction's validity. These individuals may be the executor of the will or estate, the owner of the Bitcoin, intended beneficiary, or another third party. Once the Bitcoin owner passes, the remaining two parties sign off on the transaction, and the Bitcoins are transferred to the intended recipient(s). One important thing to keep in mind with M-of-N transactions is that once the transaction is initiated, Bitcoins must remain in the same wallet. An experienced estate planning attorney at The Law Office of Aubrey Carew Sizer PLLC can answer any questions regarding an M-of-N transaction system.
Bitcoin And The IRS
According to the Internal Revenue Service (IRS), Bitcoin is considered a "convertible" digital currency, which means it is equal to real cash (legal tender) in terms of value. When it comes to Bitcoin and estate planning, this cryptocurrency should be treated like real estate as it is considered property rather than currency by the IRS. Bitcoin is taxed by the IRS in the same manner an asset is taxed.
The IRS's Form 1040 now includes a question to help establish whether cryptocurrency transactions by the taxpayer occurred within the tax year. Capital gains tax becomes an issue if the executor of the estate retains the deceased person's Bitcoin and later sells after it has gained value. Additionally, Bitcoin trading losses and income must be reported by U.S. residents on their tax returns.
How An Estate Planning Lawyer Can Help
At one point in time a decade ago, many thought Bitcoin was simply a passing fad. Those who invested in it all those years ago were undoubtedly the smart ones, considering Bitcoin continues to increase in value. However, things can and often do get very complicated when it comes to estate planning and any type of cryptocurrency. Updating documents, using the correct language pertaining to digital assets, clearly communicating your wishes in terms of Bitcoin, and dealing with taxes can be like navigating a maze in which there is no way out. An experienced estate planning attorney with an in-depth understanding of cryptocurrency can help you navigate through all the complicated issues.
The Law Office of Aubrey Carew Sizer PLLC provides skilled legal guidance to clients regarding Bitcoin and estate planning. Regardless of the type of cryptocurrency involved, we are available to help make complex and complicated estate planning issues easier to understand. Consider our firm when you want to have your questions answered and help with these important estate planning decisions for your family's future. Learn more by calling our experienced estate planning attorney today at (571) 403-2619.