A Primer on Cryptocurrency

Cryptocurrency is a form of digital currency that is not controlled by any government or central authority. Instead, cryptocurrency relies on encryption to generate new units and confirm funds transfer. There are several types of cryptocurrency, with Bitcoin being the most popular. As there is no physical component for this type of currency, it is often considered similar to cash.

The Law and Cryptocurrency

Though cryptocurrency has gained popularity as a form of currency, the tax code still requires that this asset be taxed like property rather than currency. This means that transactions involving cryptocurrency will need to reference its dollar value at the transfer time and may generate taxable income.

As it currently stands, the law treats cryptocurrency like other unconventional assets, such as art or gold coins. Though there are exceptions to this rule, most states recognize it as property rather than currency. As a result, some states require additional steps for transferring cryptocurrency before death. Because of these complications, it is recommended that you seek legal assistance when planning the transfer of your cryptocurrency.

For more information about estate planning, contact a knowledgeable attorney. When you work with a skilled legal professional, you can be assured that your interests will be adequately represented.

What Is Cryptocurrency?

Cryptocurrency exists in the digital space, and it cannot be forged or counterfeited because there is no physical item associated with it. Cryptocurrency is confirmed by multiple parties within the blockchain network when each transaction occurs.

The IRS has specific requirements regarding cryptocurrency transactions. All cryptocurrency transactions must be included on Form 8949 and Schedule D and filed with annual income tax returns. Reporting these transactions is necessary to avoid potential criminal charges for tax evasion.

While the IRS treats cryptocurrency as property instead of currency for most purposes, it does allow some exemptions from paying taxes on cryptocurrency transactions. For example, if cryptocurrency is used to purchase goods or services for personal use, it can be exempted from being taxed.

However, cryptocurrency that is held for investment purposes is subject to capital gains taxes when being sold or exchanged. This means that any profit made through investments in cryptocurrency cannot be removed from an individual’s income tax return.

Examples of Cryptocurrency

There are currently thousands of types of cryptocurrency. Some of the most popular versions of cryptocurrency include:

Bitcoin: A popular type of cryptocurrency that is decentralized and has a limited supply. It operates using blockchain technology; a digital ledger shared across a network by multiple parties. For any transaction to be recorded on the blockchain, the approval of each party involved in the transaction must be confirmed.

Bitcoin can be used to purchase goods or services, but it is primarily used as an investment.

Ethereum: An open-source type of blockchain technology that can build decentralized applications and execute smart contracts. Unlike Bitcoin, Ethereum uses gas prices to incentivize the participants in verifying transactions on its network by charging different rates for each transaction. Ethereum has the potential to significantly change how digital information is stored, but it currently has a much lower market cap when compared to Bitcoin.

Litecoin: Uses Scrypt technology, which was designed to make mining difficult, is often called “digital silver” in comparison to Bitcoin, which is known as digital gold. Litecoin was created in 2011 by Charlie Lee, the former director of engineering at Coinbase.

Ripple: A cryptocurrency that financial institutions use to transact quickly and reliably. Ripple cannot be mined because it already has a pre-determined supply. Instead, it operates using a consensus ledger, which requires validating transactions through a network of independent servers before being recorded in the blockchain. There are currently more than 100 banks that are actively using Ripple.

Monero: An open-source type of cryptocurrency that is considered to be highly private and anonymous. It offers a greater degree of privacy than other types of cryptocurrency because it uses stealth addresses, which makes transactions untraceable. Only the person who sends or receives a transaction can see the amount transferred.

Considerations for Cryptocurrency and Estate Planning

1. How do you hold cryptocurrency?
2. What is it worth?
3. How is it transferred upon death?
4. Who should be the beneficiaries and executor(s)?

The rest of this article covers these issues and provides a much needed high-level overview and roadmap for estate planning with cryptocurrencies

1. How do you hold cryptocurrency?

There are several ways to hold cryptocurrency, but it is not easy to transfer, divide and pass on as other assets like gold or mutual funds. The best way is through a “paper wallet” (a printed version of the private key for your cryptocurrency), which should be stored in a safe, fireproof location.

2. What is it worth?

Cryptocurrency values can fluctuate significantly over time, so the value of your cryptocurrency may require frequent revaluation. The challenge is that you need to regularly obtain current market prices for your cryptocurrencies and then compare them to the amount you initially paid for them.

3. How is it transferred upon death?

The transfer of your cryptocurrency at your death should be dealt with as part of your estate plan, which should include a will or trust that designates beneficiaries and executors. It is not simple to do this, so you should seek out an attorney who is an expert in this area. The process of transferring your cryptocurrency at death may involve multiple parties, including the executor, escrow agent, and/or a cryptocurrency exchange.

4. Who should be the beneficiaries and executor(s)?

Most people designate their spouse as a beneficiary for all of their assets, but it is often a better idea to create trusts for your cryptocurrency. The reason is that, unlike gold or other tangible assets, it is not always clear whether the IRS will consider cryptocurrency to be an asset subject to estate taxes at death. So, suppose you designate your spouse as the beneficiary of your entire estate, including your cryptocurrency. In that case, they are responsible for paying any taxes on the appreciation of your cryptocurrency at your death. Therefore, a better approach is to designate a trust as a beneficiary for your cryptocurrency and let that trustee handle its distributions according to the terms of the trust.

Summary:

The transfer of cryptocurrencies can be handled in an estate plan essentially the same way as other assets. Still, it requires knowledge and expertise of the nuances of cryptocurrency transactions, wallets, and exchanges.

Handling Cryptocurrency in Your Estate Plan

Cryptocurrencies are becoming more and more popular, and as their popularity increases, so does the need for estate planning with regards to them. Here are some tips on how to handle cryptocurrency in your estate plan.

To protect and manage your cryptocurrency assets, make sure you include inclusive language in the estate plan. This will allow fiduciary access to information about them and how they can accomplish their tasks efficiently with proper authorities on hand if needed!

The best way to ensure that your cryptocurrency assets will be accessed and not an undue burden on the beneficiaries of a trust or will is by creating detailed step-by-step instructions for how they can access these private keys. This ensures nobody has trouble figuring out what needs doing for this money fund to work correctly after you’re gone!

Conclusion

Cryptocurrency is a form of digital currency that is not controlled by any government or central authority. Instead, cryptocurrency relies on encryption to generate new units and confirm funds transfer. There are several types of cryptocurrency, with Bitcoin being the most popular. As there is no physical component for this type of currency, it is often considered similar to cash. However, as cryptocurrency becomes more mainstream, its volatility and lack of regulation could lead to serious financial problems down the road.

If you are looking for more information about cryptocurrency or need assistance with estate planning, please call Blade and Blade at 954-429-1200 today!