Since it was first released in 2009, bitcoin, and other cryptocurrencies that emerged after it, have become more popular. Bitcoin came out of a new data technology referred to as blockchain technology.What is blockchain?
Blockchain represents a new method of maintaining data, using a database distributed among numerous nodes to establish a continuously updated list of records, added as blocks in a chain. A “node” in financial technology terms means any system or device connected to a network where each device has a unique network address, which can be used to validate transfers of data. In bitcoin, a full node is a program that can fully validate transactions and blocks.
Bitcoin, one of the first applications of blockchain, is essentially a virtual currency and is not derived from existing currencies issued by a central bank. As with any new technology problems were encountered, which include conflict with existing financial regulatory systems and the criminal use of cryptocurrencies for fraud, money laundering and other illegal purposes.Anonymity of cryptocurrencies
While the anonymity of owning cryptocurrencies is seen as an attractive benefit, ownership comes with a burden on the owner, or the owner’s heirs, to track, access and account for the cryptocurrencies.What type of property is cryptocurrency?
For federal estate tax purposes, the Internal Revenue Service treats cryptocurrency as a tangible personal property.
State property law, however, could treat cryptocurrency as either intangible or tangible property. This is very important as state law governs who inherits your cryptocurrency.
A typical will provides for a disposition of tangible property (typically jewelry, furniture, furnishings, cars, etc.) in one manner and the residue or remainder (typically all of your financial assets in your name alone) in a different manner.Planning options for cryptocurrencies
One method to ensure that your cryptocurrency will not be lost at your death, is to specifically reference the ownership of the cryptocurrency in your will or, preferably, revocable trust.
It is important to put your heirs and fiduciaries on notice that you own cryptocurrency and then provide in a separate document all of the information necessary to digitally access the cryptocurrency, including exchange accounts, user names, PINs, passwords, security codes, private keys, digital wallets, etc. Remember to update this document from time to time and, most important, to store it in a secure location and tell someone else where it is stored.
Some states, including California, have adopted some form of the Uniform Fiduciary Access to Digital Assets Act. In those states you can appoint a “digital fiduciary” to access certain assets.Basis adjustment at death
When you die, your cryptocurrency, like every other asset, is included in your estate for federal estate tax purposes and must be valued at death.
Under current estate tax laws, the cryptocurrency will receive a step-up in income tax basis equal to the date-of-death value. If your cryptocurrency is highly appreciated, this can reduce the amount of capital gain recognized by your heirs or beneficiaries of your estate on a subsequent sale.