By Sam O’Neill

Investing in cryptocurrency – a digital or virtual currency that is secured by cryptography – has gained popularity over the past few years as coins have dramatically increased and decreased in value. Bitcoin and Ethereum remain the most widely accepted but there are now an estimated 12,000 to 16,000 cryptocurrencies and the number continues to grow.

While some tout the dangers of crypto trading, others see it as the way of the future. The rise of Dogecoin and other meme cryptocurrencies can be looked at by many as a joke, but the staying power of Bitcoin and Ethereum show this is not a short-lived phenomenon.

Cryptocurrency relies on blockchain technology which is basically a public ledger that tracks the cryptocurrency’s transactions. The blockchain eliminates the need for intermediaries when completing financial transactions. For example, a bank must subtract an amount from one account ledger and add it to another ledger. Even a simple financial transfer can take days and require a multitude of middlemen (e.g., banks, credit card processors, and employees). A blockchain transaction cuts out the middlemen. A cryptocurrency transfer can be validated and completed within minutes, even to someone across the globe. The ease of transferability is a hallmark for cryptocurrency supporters.

If you or a loved one is thinking about investing in cryptocurrency, it is important to consider how cryptocurrency can complicate or simplify your estate planning goals.

Cryptocurrency has an advantage over other financial assets in estate administration because it only requires the fiduciary to have the decedent’s passcode to access and transfer the funds. The process of distributing the estate’s cryptocurrency assets to the beneficiaries is simple compared to other assets which could require the presentation of a death certificate or other estate administration court documents.

However, the lack of third-party oversight can quickly turn into a disadvantage. If an untrustworthy personal representative or trustee unlawfully transfers the cryptocurrency, the assets can be tracked through the blockchain ledger, but it is almost impossible to recover the funds.

The anonymity of cryptocurrency ownership also creates complications if a person is intending to include the cryptocurrency in their estate plan. Cryptocurrencies stored in a wallet do not have personally identifying information. The assets will essentially die with the decedent if he or she fails to communicate such assets exists. It is imperative that anyone who owns cryptocurrency inform their fiduciaries of the existence of the asset and where the asset is stored.

Properly drafted estate plans will permit fiduciaries to access laptops, cell phones, or other electronic devices that may contain information on the ownership of cryptocurrency. However, knowledge of the asset is only part of the puzzle. The fiduciary will also need the passcode to access the cryptocurrency. Without a passcode, the funds are impossible to access. It is not generally recommended for individuals to share their passcode for security purposes but writing down the passcode and storing it in a safety deposit box or other secure location will ensure that a fiduciary can access the funds.

Tax implications are also important to consider. At this time, cryptocurrency transactions are taxable by law just like a transaction of any other property. When someone sells cryptocurrency, they must recognize any capital gain or loss on the sale. Even though it is called crypto-“currency”, it is important to remember that it does not act like currency but instead like any other taxable asset.

Careful consideration must be given to ensure heirs can control and inherit this virtual asset with unique characteristics. A consultation with a tax accountant and estate planning lawyer can ensure your estate planning goals are met. Contact Sam O’Neill at [email protected] for more information.