As most cryptocurrency owners know, if you lose the private key that grants you access to your digital wallet, any coins stored in it become inaccessible. Experts estimate somewhere between 17 and 23 percent of all bitcoins have been lost and will never be recovered because people have lost their private key. Perhaps the most famous example of this is James Howells, an IT worker in London who lost 7,500 bitcoins, or around $56 million, when his laptop was thrown away in 2013.
Imagine for a second what would happen to your currency if you suddenly died. Is there anyone related to you that even knows you own crypto, let alone how to access it? If you aren’t comfortable with whatever value you have disappearing into thin air after you die, you need to create or update your estate plan.
The fundamental issue that must be addressed is that virtual currency and the currency transfer process are both rather unique. The asset is inherently intangible, and transferring it from owner to owner is an electronic process that is just starting to be recognized as having legal implications. Add to this the fact that those who are buying and selling cryptocurrency on an exchange often do not have to reveal their true identity, and you are truly in what we in the legal world calls a grey area.
Exchanges have made the process of buying, selling, and trading digital currency pretty simple if all of the parties involved know what they are doing. But the problem is few people do know what they are doing! So, the first thing you will need to do is document what cryptocurrency accounts you have, and how to access them. Obviously, you don’t want this information floating about just anywhere, but you should at least write it down on a piece of paper or store instructions on a USB drive. You can keep these instructions stored safely with all of your other estate planning documents in a secure location that is known and accessible to your chosen estate administrator.
The next thing you will need to do is work with an experienced estate planning attorney and/or a financial planner to figure out how you will pay the taxes that are due when you transfer your currency. The IRS is treating cryptocurrency like property rather than actual currency, so any time you touch your fund balance you must be prepared to report your capital gains and losses. If your virtual currency has increased in value since you acquired it, you are facing a hefty tax bill. You should think about how your estate would cover those taxes if you were to die tomorrow, or at the end of a long, healthy life.
As cryptocurrency becomes more mainstream the legal world will eventually catch up. Until then, if you own virtual currency you need to work with an estate planning strategies attorney that knows what it is and how to put in place safeguards that will keep it from causing your loved ones a big headache when you die. Contact us today.