What’s Scary this Halloween? Not Understanding How your Cryptocurrency Works!

October 20, 2021

What’s spookier than ghosts, goblins, and creaky crypts? Buying cryptocurrency and not understanding how it works. Particularly if you pass away without notifying your family how to access this mysterious asset once you are no longer here to explain it.

If you are considering investing in it but are still on the fence, now is the time to educate yourself. Introduced in 2009, Cryptocurrency is an alternative to traditional currency, with Bitcoin becoming the most widely tracked alternative currency. Typically, Cryptocurrency is electronic-only and does not have a physical form. It is accessed by password, making it highly secure, and only a finite supply (so it is protected against inflation). Owners of the currency may store it in a Cryptocurrency wallet, a computer application that allows you to spend or receive the currency. To make a transaction, users need a “key,” allowing them to write in the public ledger, noting the transfer of the money. This key may be tied to an individual, but that individual’s name is not immediately tied to the transaction.

Here are a few highlights to understand why Cryptocurrency appeals to so many people this past decade:

  • Cryptocurrencies are not issued, regulated, or backed by a bank and therefore minimize concerns around secrecy (part of the appeal is that it can be used somewhat anonymously)
  • Its ability to hold value and not be inflated away by central banks that want to print money
  • It is very difficult to counterfeit due to the blockchain ledger system that manages the currency
  • There are thousands of different types – some of the top Cryptocurrencies are currently Bitcoin, Ethereum, Tether, Cardano (ADA), Binance Coin (BNB)
  • As assets, Cryptocurrencies are generally stored in digital wallets, commonly a blockchain wallet, which allows users to manage and trade their coins

But its special characteristics also bring about some unique considerations in estate planning. Bequeathing this digital asset is not as simple as passing on real estate or cash in a bank account. It is a whole different kind of property, and you must be sure your heirs understand what you are leaving them – while you are still with them.

Despite the last part of its name, cryptocurrency is not currency as we usually think of it. While it is used to obtain items of value, it is not money; you cannot take a million bitcoins and buy a house. Rather, Cryptocurrency is considered personal property; the difference influences the way Cryptocurrency is handled after death. For instance, this kind of asset does not get a traditional beneficiary designation, so after your death, your heirs will have to go through a court supervised probate process to collect the asset.

Cryptocurrency’s password requirements make it imperative for the owner to remember it. Unlike your checking account, it has no password-recovery tools; if you lose it, you will also lose access to your property. If you intend to leave your Cryptocurrency to your heirs, make sure they understand the password requirements. You may not want to give them the password while you are still alive. An alternative is to include the password with the other digital assets you provide to your Personal Representative listed in your Last Will and Testament. By “other digital assets” we mean things like the password to your email account, social media account, and pin to your personal computer.

For complete peace of mind, you should allow your Personal Representative to access and obtain crypto funds through estate planning documents. This avoids any legal complications and ensures that all access to the funds is properly set up.

Lastly, because the IRS has labeled Bitcoin an asset and not a currency, every transaction with Bitcoin has the potential to create a taxable capital gain, meaning you must report it on your tax return. If you spend bitcoins at a price higher than you purchased them, you will owe tax.

One of the most important items to consider when owning cryptocurrency is setting up and explaining the process for the transfer of crypto accounts to estate grantees (your heirs). Be sure you understand all the elements of your estate plan, especially when technology is involved. Contact OC Estate & Elder Law at (954)251-0332 or info@ocestatelawyers.com to get started with a free phone consultation about your needs. Our attorneys are fluent in English, Spanish, and Russian.