Cryptocurrency is a concept first introduced in 2009 with the first offering of bitcoin, the most well known virtual currency. Many people do not understand the concept, but it can be an asset with value, so it should be included in the owner’s estate plan. Legal concepts are evolving regarding how cryptocurrency will be passed to heirs or beneficiaries through means like gifts, wills, trusts or by operation of law like other property when someone dies without a will.
What is cryptocurrency?
Cryptocurrency is an encrypted digital, virtual (existing only on computers) currency that is not created by any government or central banking authority. Rather, it is created through a process of resolving math problems online, called mining. Bitcoins are used to conduct transactions or for investment.
The IRS considers bitcoin to be property. Gain from bitcoin transactions is taxable like gain from other property transactions and wages paid in cryptocurrency are also taxable. However, the IRS only taxes transactions if the virtual currency is “convertible,” meaning it can be exchanged for real currency like dollars.
Bitcoin ownership issues
If someone owns cryptocurrency that is convertible to regular money, what happens to that asset when the owner dies?
Bloomberg published an article about the accidental death of a 26-year-old man who owned bitcoin of significant value. His father spent three years trying to solve the problem of accessing the currency. According to the article, unless the deceased owner gave someone “the keys to access [the person’s] digital wallet,” it could be inaccessible and considered abandoned.
In this case, the son’s “wallet” is hosted by a company. A wallet can have an “unlimited number” of addresses, each having bitcoins, so it is impossible to comprehensively identify every bitcoin a person owns unless each of the addresses are known, in addition to the keys.
Cryptocurrency that can have value raises the stakes of leaving the information necessary to access it, including online addresses and private access keys.
Bloomberg reports that CoinBase, a virtual currency custodian, will keep a customer’s keys and in case of death, documents like a will and death certificate could be used to get the assets transferred to survivors.
Unfortunately, encryption and other protections used to protect virtual currency from hacking also prevent legitimate family survivors from accessing it in case of the owner’s death.
Anyone with cryptocurrency should speak to an estate planning lawyer about how to direct its transfer to beneficiaries of the owner’s choice at death, such as in a will (along with providing keys and addresses). This is an evolving area of law that attorneys will follow closely to assist clients in preserving this potentially valuable asset.