Will It Include My Wallets? – Questions and (some) Answers About Estate Planning With Cryptocurrency.
Over the past 15 years, cryptocurrency has slowly become an integrated part of society and day-to-day life. Gas stations have Bitcoin ATMs, famous athletes and celebrities (in)famously starred in a commercial for a Cryptocurrency venture that failed spectacularly, and the latest wave of newly minted millionaires and billionaires largely credit their rise to this new “decentralized” currency.
On December 5th of this past year, the most popular cryptocurrency, Bitcoin, hit a record-high value of $100,000. This surge in price has renewed interest among investors and regulatory bodies alike—everyone wants a piece of the ever-growing pie.
This very concept of cryptocurrencies being “decentralized” and “stateless” is one of the driving forces behind their popularity, but it also serves as a thorn in the side of lawyers, legislators, and laypeople who are trying to navigate the ever-changing cryptocurrency landscape.
IDENTITY:
One of the main issues facing estate planners is how to adequately identify assets such as Bitcoin, DogeCoin, Ethereum, and other cryptocurrencies. Because there is no centralized bank or account that can identify individuals for succession planning purposes, many recommend transferring your cryptocurrencies prior to death (to the extent that this is possible for someone).
Cryptocurrencies rely on a technology known as the “blockchain,” which acts as a sort of ledger showing any transfers of coins in and out of an account. While most cryptocurrency transactions would appear on the blockchain, there are a few ways to complete a transfer without it appearing on the blockchain (such as by physically giving someone a “cold wallet”—discussed further below).
This becomes a further issue as it can be difficult to determine when a cryptocurrency asset was transferred, especially if transferred in a manner that would not appear on the blockchain. Whether a cryptocurrency transfer is recorded depends on what type of storage vehicle is used.
STORAGE:
There are a few different options out there that people use to manage their cryptocurrencies. The first consideration is whether the currency will be held by the owner (generally through a personal wallet, as discussed below) or if a third party, such as a crypto exchange, will hold the currency. Crypto exchanges serve as a brokers for purchases and sales involving virtual assets. Some of the most popular players in the crypto space, such as Binance and crypto.com, are crypto exchanges that have faced much controversy over the last few years. Perhaps the most well-known crypto exchange to date has been FTX, which very publicly went bankrupt in 2022 after allegations that the founder, Sam Bankman-Fried, and the other owners had been embezzling and misappropriating clients’ deposits. Since 2022, there has been a growing fear from investors about using these services, as there is nothing to protect against the loss of assets in situations like the one described above.
The most common option today is to use a “hot” wallet, or an online database that keeps track of coins going in and out. Some of the more popular hot wallet options include Trust Wallet (which has nothing to do with trusts in the estate planning sense) and Coinbase Wallet.
The other option is to use a “cold” wallet, a tangible device to store keys offline. Keys in cryptocurrency are essentially passwords that allow access to the funds. As cyber-attacks on crypto-related funds and depositories increase, more people will look for cold wallet options to prevent possible loss in the event of a hack.
These two types of storage have significant differences when it comes to estate planning. For instance, most jurisdictions would likely treat the cold wallet option as tangible property. This would mean that theoretically, under Florida law, a cold wallet could be passed down to a beneficiary simply through the use of the Separate Writing Memorandum (allowed under Section 732.515 of the Florida Statutes).
Regardless of the type of storage used, any individual wishing to pass crypto down to their beneficiaries must give the key(s) for any wallets they may have to the Trustee of their Trust.
VALUE:
The IRS released guidance on April 12, 2024 directed to taxpayers who received or sold any cryptocurrencies, including non-fungible tokens and stablecoins. In this publication, the IRS warned taxpayers that in most situations any transfer of cryptocurrency is a taxable event and should be reported as such on their tax forms.
Notable exclusions to the above are:
Any transfer to another account/wallet owned by the same taxpayer
Holding (not transferring) digital assets in an account/wallet
Purchasing digital assets on electronic platforms using real currency (presumably Fiat money, but the IRS has not yet released an official definition)
Additionally, this IRS Notice advises taxpayers that income related to their digital assets—such as capital gains and losses—is also taxable, not just the transfer itself.
CONCLUSION:
In what may be the most lawyerly answer to the question of “What should I do to plan for my cryptocurrencies?”
Unfortunately, “It depends.” One common practice is to place cryptocurrency holdings into an LLC, which offers such advantages as anonymity and an easier manner of passing the assets to beneficiaries. Beginning in January of this year, however, most new LLCs must report information on the entity’s beneficial ownership to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). This change largely defeats the anonymity benefits that once existed with this type of planning, and so many investors are looking for new methods of holding and passing down their investments.
The cryptocurrency landscape is relatively new and growing quickly, but regulators are quickly catching up. Common IRS Forms 1040 and 1120 (for personal income tax and corporate income tax, respectively) have been updated in the last few years to include questions on virtual currency, and many more changes are surely coming.
Donald Trump, who was elected the 47th President of the United States in November, has been seen as a strong pro-crypto supporter. In July of this year, Trump led one of the biggest Bitcoin conferences to date and has vowed to keep all of the Bitcoin that the U.S. Government has seized from criminals.
If you want to stay up-to-date with the latest information on planning for your digital (and other) assets, be sure to check our Jacksonville Estate Planning Lawyer website for future updates.
If you or someone you know is looking for assistance on estate planning with respect to their digital assets, Bitcoin, Ethereum, NFTs, or any other type of blockchain-related currencies, please contact us via our online contact page for the Jacksonville Estate Planning Lawyer or call us at 904-990-8000.
