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How to Estate Plan When You Own Cryptocurrency

What is Cryptocurrency?

Ethereum, Bitcoin, Ripple – you have heard all the names. But, what is cryptocurrency in reality, and what is all the craze around it? You probably do not use this type of currency in your everyday life, so why is everyone online ooh-ing and aah-ing about the values? Cryptocurrency or “crypto” is an online or digital asset that can be used to purchase goods or services. Obviously, a vendor has to actually accept this type of currency otherwise you cannot purchase goods or services with crypto. Cryptocurrencies use decentralized control and there are no central banking systems. You have likely heard of “Bitcoin,” because it was the first decentralized cryptocurrency issued. Many other types of cryptocurrency have popped up since Bitcoin came on the scene, which is why you likely hear so much buzz around crypto online and on television.

How Does the IRS Treat Cryptocurrency?

The IRS is early in its stage of understanding cryptocurrency. Currently, the IRS treats crypto as a piece of property and not currency. Therefore, when estate planning, you must treat this asset like property rather than money. This can be confusing, since crypto’s purpose is to serve as a currency to buy and sell items. When you transfer crypto, you will receive losses or gains. Unlike a normal stock transfer, there are no dividends. No interest is accrued either. Think of crypto like real estate and treat it as such for estate planning purposes. The current market capitalization of cryptocurrency is $1.81 trillion (yes, you read that correctly).

Gifts with Cryptocurrency

The estate federal tax rate for gifts is 40%, and the annual gift tax exclusion amount is at $15,000. Note, these rates are effective under the Tax Cuts and Jobs Act of 2017. There is a new president in office, therefore these numbers may change. Despite the fact that these exclusion amounts are relatively high, gifts are not just for rich people. State exclusion amounts tend to be lower, so consult with an attorney about the best way to use gifts for crypto estate planning.

Since you are permitted to gift up to $15,000 of crypto each year free of gift taxes, speak with your lawyer about making these transfers to loved ones to maximize your tax benefits. Once you make this transfer, appreciation on the crypto is not taxed on your estate when you die. Your estate value goes down, and there are fewer estate taxes due.

You can also gift your appreciated crypto to charities. You will avoid paying capital gains taxes on the crypto, and on top of that, you will receive the charitable donation deduction. You will need to find organizations that accept crypto, so start doing that research or ask a loved one to assist so that you can maximize your savings before next tax season.

When you gift cryptocurrency, get an appraisal of the fair market value of the crypto being gifted. You will want to have this “back-up” for the IRS if you ever get audited.

Less Red Tape

You might wonder how cryptocurrency is stored – we keep cash in our wallets, so we must keep crypto somewhere too, right? Bitcoin and other crypto are stored in a digital wallet. The digital wallet can be either hardware or web-based.

At the time of your death, there is certainly less red tape involved with transferring your crypto assets. For normal assets like cash, a bank will need to see an original death certificate before they turn over the proverbial “keys to the kingdom” to a beneficiary or the executor of an estate. With crypto, the fiduciary just needs to have the decedent’s passcode to transfer the account for estate administration. Note though, that it is very important to include your passcode in your estate plan. Someone needs to have the code – accessing Coinbase can be a pain for your loved ones if you do not provide this information to your lawyer or beneficiary.

Call us today if you have further questions about estate planning with crypto.