Cryptocurrencies such as Bitcoin, Ethereum, and the satirically named Dogecoin have seen increased news coverage in recent months. The 24-hour high value of Bitcoin on August 1, 2021, was $46,691.09. But what, exactly, is cryptocurrency, and how can you incorporate it into your estate plan?
Cryptocurrency is a digital medium of exchange that does not exist in physical form, but instead consists of a decentralized and computerized ledger. This ledger, commonly referred to as a blockchain, is a continuously growing list of time-stamped transactions that are linked and secured using cryptography. Transactions are typically peer-to-peer, without the involvement of any financial institution or other middleman. Although this system is incredibly secure, transactions are also virtually irreversible.
Unlike traditional currency, cryptocurrency is not subject to any centralized government authority. For this reason, some countries have attempted to ban or restrict the use of cryptocurrency, and certain financial institutions will not accept cryptocurrency as a form of exchange. In March of 2014, the Internal Revenue Service decided that Bitcoin and other cryptocurrencies should be treated as personal property (similar to stocks or real property) for tax purposes. Sales of cryptocurrency are therefore subject to capital gain or loss, and cryptocurrency created through mining or received as payment for goods or services is subject to ordinary income tax. In recent years, the IRS has ramped up enforcement efforts by subpoenaing various cryptocurrency exchanges for their transaction records.
Like physical currency, cryptocurrency can be stored in a digital “wallet.” This wallet can be hardware-based (stored on a USB drive or other similar device) or web-based (stored in a digital cloud service). Generally speaking, hardware-based wallets are more secure since they cannot be hacked, but it’s also possible to physically lose them. Regardless of how the wallet is stored, it cannot be accessed without the appropriate credentials. One downside to this storage method is the potential for cryptocurrency to become inaccessible. It is estimated that as much as twenty percent of the world’s cryptocurrency is currently stored in inaccessible wallets.
For those who own cryptocurrency, it is critical to ensure that the individuals who will be administering their estate are aware of the cryptocurrency’s existence and have the tools necessary to access and distribute it. Step one of this process is to keep a comprehensive list of all cryptocurrency wallets, including the location and username, password, access key, etc. for each such wallet, in a secure location, such as a fireproof safe or safety deposit box. Step two is to ensure that your personal representative or successor trustee knows where to find this information upon your death or incapacity. Keep in mind that if this information is not kept up to date, it will be impossible for the successor fiduciary to access the wallet. It may also be necessary, depending on the successor fiduciary’s familiarity with cryptocurrency, to provide step-by-step instructions for how to access, distribute, and exchange the cryptocurrency.
Finally, it’s important to name a successor fiduciary who you trust completely. Given the ungulated nature of cryptocurrency, successor fiduciaries are not required to produce a death certificate or identification when accessing a decedent’s cryptocurrency. Most transactions are permanent without the recipient’s cooperation. Although cryptocurrency presents a number of unique challenges, the continued growth in its use and value suggests that it’s here to stay.