Until recently, the word “cryptocurrency” was not part of the average person’s lexicon. Today, however, most people are familiar with the term and many people own and/or use cryptocurrency. Despite the name, cryptocurrency is not exactly a currency in the traditional sense of the word. It can sometimes be used as a currency, but it is not tangible like a dollar bill or a quarter. If you own cryptocurrency though, it should be addressed within your estate plan. Toward that end, a Los Angeles estate planning lawyer at Collins Law Group explains how to include cryptocurrency in your estate plan.
What Is Cryptocurrency?
Cryptocurrency is a digital asset created by computer operators referred to as “miners.” These units of digital currency are record on a “blockchain” which is made up of a string of verified public transaction records. That’s correct – although people think of cryptocurrency to transfer money without the oversight of the government or law enforcement, the truth is that cryptocurrency transactions can be easily tracked. What cannot be easily uncovered is the identity of the parties to a cryptocurrency transaction. This is because owners of cryptocurrency are assigned a “wallet number.” That wallet number is required to access, trade, or purchase something with cryptocurrency. In 2022, thousands of different cryptocurrencies exist; however, there are still only a few that are commonly recognized and even fewer that are readily accepted for use in financial transactions.
Is Cryptocurrency an Asset?
Some people own cryptocurrency as an investment while others truly see it as the currency of the future. That law, however, is often slow to catch up with changes. As such, the Internal Revenue Service (IRS) defines cryptocurrency as property, meaning it is treated more like a car than cash. From a tax perspective, that means that profits from trading or selling crypto are subject to capital gains taxes. Even a simple exchange of one cryptocurrency for another type of cryptocurrency triggers a taxable event in the eyes of the U.S. government. Moreover, if cryptocurrency is an asset, how does it fit into your estate plan?
Including Cryptocurrency in Your Estate Plan
Cryptocurrency needs to be clearly identified and addressed within your estate plan. Whether you plan to gift cryptocurrency during your lifetime or at the time of your death, you need to continuously monitor how it is treated so you understand the tax implications of gifting it. In addition, consider the following when incorporating cryptocurrency into your estate plan:
- Identify (in detail) the cryptocurrency you own. If you trade in crypto, this will be an ever-changing list; however, it is crucial that you specifically and clearly identify each type of crypto you own, how much you own, and the virtual location of the wallet where the cryptocurrency can be found.
- Safeguard your access codes. Without the access codes, PINs, and wallet locations, your cryptocurrency is completely inaccessible. Unlike a bank account that can be accessed after proving your identity, a cryptocurrency wallet cannot be accessed by anyone without the access codes. The catch-22 is that with wallet location, access codes, and PIN, anyone can access cryptocurrency – and there is nothing you can do about it once it has been transferred or used. The information should be stored is a highly secure and secret location.
- Include your device. If you are not a tech person by nature, this may be difficult to wrap your head around, but you also need the device on which the virtual wallet exists to access the cryptocurrency. It is not like an app for your bank account that can be downloaded on any cell phone. For that reason, your device should also be specifically and clearly identified in your estate plan.
- Choose someone to trust. While you should reference your cryptocurrency in your estate plan, and designate a beneficiary for the cryptocurrency, you may not wish to include all the necessary information for accessing the cryptocurrency in a Will or trust. In the wrong hands, that gives someone access to your cryptocurrency. With that in mind, you need to decide who to trust with the information needed to access the cryptocurrency. Ideally, you should also have a back-up person or secure location (such as a safety deposit box) to store the information.
- Include a gift memorandum. Although cryptocurrency is considered an “asset,” there are not ownership documents or titles created when you purchase crypto. If you plan to gift the crypto you own, you should execute a gift memorandum and request a gift receipt. Within the memorandum you should include the type and quantity of crypto being gifted, the fair market value, and your basis in the asset.
Contact Collins Law Group
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about including cryptocurrency in your estate plan, be sure to consult with an experienced Los Angeles estate planning attorney. Contact the Collins Law Firm by calling (310) 677-9787 to register for one of our FREE estate planning workshops.