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Cryptocurrency: Safeguarding your Bitcoin within your estate plan
by Dan A. Baron, Baron Law LLC
Many of us have dabbled in the cryptocurrency market, and most have at least heard of the various types of these digital exchanges. To name a few: Bitcoin, Ethereum, Tether, Polkadot, and my all-time favorite Dogecoin (or “Doggy Coin” as I like to call it) have become popular investment strategies for many Americans. The value of some of these digital exchanges has skyrocketed, making taxes and estate planning even more complex. I recently spoke with a client who traded 1,000 Bitcoins for a used bicycle in 2008: today that Bitcoin would be worth over $27.9 million. If you have invested in Bitcoin or another cryptocurrency, you should pay close attention to how you leave your precious coin to your family. Those who understand how the cryptocurrency platform works also understand how easily your fortune could be lost.
What is cryptocurrency?
The US dollar, the euro, the Swiss franc are all examples of currencies. They are also means of exchange. Before money, we traded goods and services like spices, rum, or shoe manufacturing. Money, whether represented by a metal coin, a shell or a piece of paper, does not always have value. Its value depends on the importance that people attribute to it: as a means of exchange, a unit of measurement and a store of wealth. When I think of cryptocurrencies, I think of my baseball card collection versus my diamond necklace. To me, my Minnie Miñoso baseball card is worth more than a diamond necklace because I don’t wear jewelry. Likewise, cryptocurrencies have become more in demand because our society finds value in what it represents, even if it is simply an arbitrary value.
Managing cryptocurrencies while we’re alive
What makes cryptocurrency unique is that it is a digital payment system that does not rely on banks to verify transactions. Cryptocurrencies are coins stored in a “wallet”. There are two types of wallets, hot and cold. A cold wallet is tangible and non-digital: accessible on a hard drive, USB drive, or simply written on a piece of paper. A hot wallet is intangible and digital: accessible via an online exchange with a username and password. Since cold wallets are not stored digitally, they are easily lost. The New Yorker reports that over half a billion dollars worth of Bitcoin could be found in landfills around the world in 2021. This error most often occurs when someone accidentally throws away their USB drive or hard drive that contains the encryption key.
Hot wallets are much harder to lose. As mentioned, there are multiple platforms that allow users to log in via a username and password instead of a USB drive hidden under the pillow. The biggest problem with hot wallets is protection from hackers. Just this year, one of the world’s largest crypto platforms, Crypto.com, reported more than $30 million stolen by hackers.
Manage Crypto if you are disabled
If you become disabled and need someone to manage your resources on your behalf, it is imperative to specifically authorize access to those resources. The IRS considers cryptocurrencies to be “property.” Therefore, your financial power of attorney should define cryptocurrency as property within the document. Since encryption is unregulated, it is also possible for your trusted agent to gain access to hot wallet accounts via a username and password as an unauthorized user.
Passing cryptocurrencies to our loved ones
Passing on your precious coin to your loved ones can be a challenge. The biggest problem with cryptocurrencies is their ghost-like existence. Those who own cold wallets go to great lengths to hide their flash drives and other tangible tokens. Therefore, no matter what resources you have, it is crucial to be organized and work with your family, lawyers, and financial advisors so that everyone knows that cryptocurrency exists. We recommend storing your private key in a secure, fireproof box. Remember, a safe deposit box at a bank will require probate court involvement if the account is not jointly owned. Inside the safe we recommend a cryptocurrency summary that outlines the investment details. More importantly, make sure your executor and interested parties are aware of the existence of the asset, otherwise your investment could end up in the bin as bad rubbish.
Avoid probate and the IRS
If you have a simple will, your cryptocurrency will go through a long and expensive probate process. Some platforms allow you to name a beneficiary and/or maintain joint ownership. In this case, you will be able to avoid succession; however, you still have to deal with the IRS. The best way to avoid probate and have a favorable IRS outcome would be to attach cryptocurrency to a revocable trust.
The IRS considers cryptocurrency to be property, and earnings are subject to capital gains tax. Additionally, unlike a stock listed on the Nasdaq, cryptocurrency can have different values on various exchanges, so evaluating the currency’s conversion into U.S. dollars can be complicated. Due to capital gains, it may be desirable to bequeath your cryptocurrency to a charitable organization through a trust. This will reduce capital gains on the estate and avoid probate.
Estate planning professionals
It is crucial to ensure that a full cryptocurrency inventory is accounted for, otherwise your precious coin could be lost forever. Advisors who provide clients with a digital asset inventory should complete all usernames and passwords for their accounts within their estate planning portfolio. Careful, thoughtful cryptocurrency planning can help you and your loved ones sleep (a little) better at night. For more information or to discuss your estate planning goals, contact Baron Law at 216-573-3723, or
dan@baronlawcleveland.com.
Dan A. Barone, Baron Law LLC
Sponsored by
Baron Law LLC
Crowne Centre, Suite no. 600
5005 Rockside Rd
Independence, Ohio 44131
216-573-3723
www.baronlawcleveland.com
The opinions and statements expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.