Here’s what could happen to crypto when you die – and why you need to plan ahead

Cryptocurrency Investors do everything they can to safeguard their property. Crypto enthusiasts often use hot and cold wallets, trusted crypto exchange platforms, and complex cryptographic keys to protect digital assets from theft and other dangers. But what happens to those crypto assets when their owner dies?

If a person who owns cryptocurrency dies without a will and without providing instructions on how to access those assets, the short – and unfortunate – answer is that they are lost forever. By some estimatesapproximately 20% of all Bitcoin tokens are lost and unrecoverable.

If you are a crypto investor, it is essential that you take steps now to ensure that all your digital assets can be safely passed on to your heirs.

Cryptocurrency as a digital asset

In the US, cryptocurrencies are considered digital assets by the IRS, and more specifically, convertible virtual currencies. That is, the government treats crypto tokens as property rather than currency. This has several tax implications and also affects the way cryptocurrencies are treated in matters involving inheritance and transfer of ownership.

Given their status as digital assets, the U.S. government views cryptocurrency tokens in a manner more akin to stocks or tangible property such as artwork and jewelry than to cash. This means that crypto ownership is possible subject to capital gains tax.

Key to planning the transfer of ownership of crypto assets is understanding their uses purses. These applications help secure digital assets and facilitate transactions between crypto investors. They are typically secured with both an address or a public key (a way in which the wallet can be publicly identified so that other wallets can be tokenized, for example) and a private key (a secure password typically only available to the holder of the wallet). the wallet).

In many cases, wallets are provided by crypto custodians, such as digital asset exchanges, and are accessible through their interfaces. Otherwise, one can access non-custodial wallets using the private key or a mnemonic.

Cryptocurrency challenges in estate planning

Because cryptocurrency is not treated like traditional money by the IRS, the process is complicated estate planning and inheritance involving digital tokens are more complex. Because the government considers crypto a personal asset, you may need to specifically name a beneficiary to inherit cryptocurrency investments.

Crypto may also be subject to various estate and transfer taxes. When the beneficiaries of your crypto holdings use these tokens as a payment method or start exchanging them for fiat money, this will likely trigger a tax event and they will have to calculate capital gains or losses, for example. If you give crypto as a gift, it will not be recognized as income until it is sold or redeemed.

How to ensure that your beneficiaries inherit your cryptocurrency

While a will and a detailed, written plan for transferring ownership of digital assets are extremely helpful to your survivors, it is critical to remember that this is not enough. While a will can make it legally clear that, for example, your children own your crypto assets, this in itself does not guarantee that they can access and use those assets.

Chris and Charles Brooksthe CEO and CTO of CryptoAssetRecovery.com, explained that there are several other steps investors should take to facilitate a smooth and complete transfer of cryptocurrency ownership. These steps include:

1. Inform your heirs

“Make sure your loved ones – or at least your lawyers – know you have crypto.” The father-and-son team running the digital asset recovery service suggested that communication is an essential first step, as beneficiaries will be helpless without knowing you have crypto assets and which wallet they are stored in.

2. Document (and secure!) backup

“Record seed phrases or other forms of backup, keep them safe, and share them with people you trust.” Documenting the ways to access your wallet is also essential. However, keep in mind that anyone with this information can access these tokens, so it is critical to keep the documentation safe.

3. Test your recovery seeds

While you still have access to your digital wallet, test the recovery seeds to make sure they work for your dependents and that they are linked to the correct wallet with the assets you want to transfer.

4. Build in redundancy

“Consider upgrading your plans using secret sharing and/or multi-signature techniques to share partial backups with multiple people.” Building redundancy into your cryptocurrency management practices will help protect it from theft during the transfer process to a beneficiary.

5. Consider using a custodial service

The Brookses said that while some crypto investors shy away from custodial services due to the history of hacks targeting these companies, “the benefits are that these custodians have extremely robust security practices and existing systems for transferring assets to your estate upon death. ” When working with a custodian, beneficiaries should be prepared to provide documentation, including a copy of your will, probate documents, and proof of identity.

6. Don’t rely on current technology

The Brookses suggested that crypto investors should avoid using cell phones as a backup method because the phone you are using may be dead or the wallet app you are using may no longer function by the time a transfer is needed. Likewise, some of the most popular crypto wallets today may no longer be supported at the time of your death.

Estate planning for cryptocurrency investments should also include preparations for someone in one confidant or executor role appointed to ensure control of these tokens for a specified period of time. Suzy WalshAmerican College of Trust and Estate Council Fellow, explained that crypto investors should be especially careful when selecting a fiduciary.

“Fiduciaries are supposed to keep things safe and manage… they are not supposed to hold volatile assets” like crypto tokens, she said. She added that fiduciaries are not equipped to handle and hold cryptocurrency securely.

On the other hand, investors can take advantage of the volatility inherent in the crypto market when it comes to taxes. For example, by donating tokens at a time when their value is low, investors can minimize transfer taxes. Ideally, a fiduciary should also be familiar with this aspect of crypto management.

The bottom line

Unfortunately, the various security measures used to protect crypto assets can make it difficult for an investor’s relatives to gain access. To protect your assets while ensuring you have a plan for them after your death, take the time to include them in your will, designate beneficiaries, communicate clearly with those beneficiaries about what you assets and how to access them, and for secure documentation, including wallet addresses and private keys or access codes for safekeeping.

If you expect to appoint a fiduciary, make sure this person knows the cryptocurrency well and is prepared to deal with volatility and security issues while overseeing your assets.