At its basic level, cryptocurrency is a purely digital currency that uses blockchain technology to create a public, decentralized, immutable ledger. Transferring cryptocurrency occurs when the transferor enters the recipient’s public address where the cryptocurrency is to be sent, the transfer amount, and, optionally, a note describing the transfer. The transferor presses send, and a decentralized network of independent computers validates and executes the transaction and lists it on the public ledger.
The IRS’s current position is to treat cryptocurrency as property, not currency, for tax purposes. As a result, when creating an estate plan, it is crucial to view cryptocurrency through this lens. This means, for example, that such property could result in reportable financial gains or losses, just like real estate (sale price – cost basis = reportable income or losses). Therefore, holders may want to consider making gifts of cryptocurrency to reduce income taxes accruing on their holdings.
The most fundamental risk of this digital currency can be summarized by the adage: “Not my key, not my coin.” When you first buy cryptocurrency, you are issued two keys: a public key, which works like an email address (meaning you can safely share it with others, allowing you to send or receive funds), and a private key, which is typically a string of letters and numbers, like: JYXsLxHETxLGAghRQdixF4DGzV5ktopu4wjsuVmjCMZ58Yk24r, which is not to be shared with anyone. Without the latter, you cannot make cryptocurrency transactions and prove ownership of your holdings; your digital currency may be forever lost in the ether. Hence, “not my key, not my coin.” Just Google “James Howells” to read about a man who, in 2013, while cleaning out his office, mistakenly threw out a computer hard drive containing the private keys to what is now worth more than $180 million in cryptocurrency. Like Mr. Howells, who is still scouring the local dumps of Wales for his loot, not setting up a succession plan for your cryptocurrency holdings could mean surrendering significant financial holdings.
When planning an estate, be sure to discuss any cryptocurrency holdings you may have or intend to acquire with your advisors. This information will allow your attorneys and advisors to properly draft estate planning documents to permit your fiduciaries to access your digital assets, such as laptops and cell phones, holding the private keys to your digital currency. Furthermore, even if you would provide your fiduciaries with the ability to access your cryptocurrency upon your incapacity or death, failing to document this permission in your estate planning documents could cause your fiduciaries to violate state and federal laws.
Cryptocurrency is here to stay, and Regatta Trusts and Estates is here to help you create a succession plan for this relatively new asset class.