Wednesday, July 29, 2015
Bitcoin, and other cryptocurrencies, have spiked in popularity in recent years as users seek alternate payment forms and investment opportunities. However, the explosion in Bitcoin use has gotten ahead of the law and makes planning for an estate with the currency more complicated than one without. Here are some tips on steps to take if a cryptocurrency is part of estate:
- The IRS has ruled that Bitcoin is property rather than currency for tax purposes. As a result, stepped up and down basis in Bitcoin may come into play and affect the amount of tax that will have to be paid if the coin is sold.
- Since Bitcoin is a digital asset, it is imperative that the estate planner knows about the currency so they can include the proper notification to the trustee or executor or else risk loosing track of the Bitcoin.
- Digital currencies are usually protected by an encryption key or password and cannot be accessed without that information. Thus, the estate planner or other trusted source needs to be given the key and passwords so that the Bitcoin may be transferred to the intended beneficiary.
- When creating a power of attorney, explicitly state that the document grants the right to control any digital currencies as well as providing keys and passwords to access digital wallets.
- If Bitcoins are a major part of a trust's assets, the prudent investor rule may come into play and force the trustee to diversify into other investments. This required diversification might not be required if the jurisdiction recognizes Bitcoin as a currency rather than personal property.
See Jeff Vandrew Jr.,5 Things Bitcoin Owners Must Do When Estate Planning, Coindesk, July 28, 2015.
Special thanks to Jim Hillhouse for bringing this article to my attention.