What Happens to My Crypto When I Die?
Cryptocurrency is no longer on the fringe. It’s evolved into a legit digital asset that’s attracting more and more investors. Sixteen percent of U.S. adults have invested in, traded or used crypto, according to a recent Pew Research Center survey. In November 2021, the price of Bitcoin skyrocketed to an eye-popping $69,000. With cryptocurrency taking up more space in investment portfolios, it begs one obvious question: What happens to crypto assets when you die?
When Bitcoin billionaire Mircea Popescu passed away last year, his digital fortune was rumored to be somewhere in the neighborhood of $2 billion—which may now be lost forever. It drives home the importance of including digital assets in your estate plan. When it comes to financial planning, the reality is that cryptocurrency represents uncharted waters.
What Even Is Cryptocurrency?
Chances are you’ve heard of crypto, but you may be confused about how it actually works. It’s basically a digital currency you can use to buy and sell a variety of goods—or sell outright for cash. There are tons of players in this space, but some of the biggest crypto giants include Bitcoin, Ethereum and Tether. These kinds of currencies are supported by blockchain technology. They lean on a huge network of computers to manage their systems and catalog transactions in a way that’s touted as being super secure. Crypto, by design, is fully decentralized and not entangled with any government or central bank.
You can buy cryptocurrency through online exchanges like Coinbase, Binance and Gemini. Lots of platforms allow you to store assets within their digital wallets. You can also download wallets via apps or desktop software, though there’s always the risk a scammer could gain access to your information. Some investors prefer “cold wallets,” which aren’t connected to the internet (such as a USB drive). This can offer a layer of protection against cyber threats, but you’re on your own if the device is lost, damaged or stolen.
How Do You Access Your Cryptocurrency?
Crypto assets are unique in that your name doesn’t actually appear on your account. Similarly, digital wallets don’t allow owners to designate a beneficiary at this point. This is precisely why it’s so important to address digital assets in your estate plan.
Let’s talk first about passwords. Once your crypto is locked up in a digital wallet, you’ll need a passcode to access it. This is extremely important because you cannot retrieve it any other way—and if you lose it, there’s no password recovery system to fall back on. If your passcode dies with you, your loved ones will never receive their intended inheritance.
Special Estate Planning Concerns for Cryptocurrency
If digital assets make up any part of your investment portfolio, you’ll want them included in your estate plan. The truth is that the cryptocurrency industry is largely unregulated. There’s no governing body providing oversight here, though this may change. Estate laws can also be fuzzy.
What’s more, crypto assets aren’t treated like a cash inheritance in the eyes of the IRS. Instead, it’s akin to inheriting stocks. If you leave behind a bunch of cryptocurrency that’s appreciated, your heirs may get hit with a tax liability. (Consider it the price you pay for capital gains.) A skilled estate planning attorney can help you come up with the most tax-efficient plan for your loved ones.
With that said, here are some estate planning tasks if you own crypto assets:
Connect with an estate planning attorney who has experience handling cryptocurrency matters, including tax implications to consider
Organize all your cryptocurrency assets and be sure they’re included in your net worth statement. This includes clarifying the purchase price for each cryptocurrency.
Make a plan with your attorney for how you want these assets to be distributed after your death. They may suggest appointing a special trustee to take care of these assets.
Clearly document where your heirs can access your digital wallet. Again, anyone with the password can make off with your cryptocurrency. You may choose to keep this information in a safe deposit box or other secure location.
A General Word About Investing in Cryptocurrency
Investing in crypto seems to be all the rage right now, and we get it, but it’s worth noting that these are highly volatile assets—even more so than stocks. Prices tend to swing wildly, which isn’t ideal for faint-of-heart investors. Remember how we mentioned that Bitcoin once soared to $69,000? A month later it dropped over 30%. If you do want to dabble in crypto investing, it’s wise to maintain a balanced portfolio to help mitigate risk. If crypto bounces around, you’ll hopefully have other assets to help make up for the loss.
It’s something that takes careful planning, as well as a clear understanding of your financial goals, investment timeline, and risk tolerance. We can walk you through it if you need some expert guidance.