Investment portfolios have always been somewhat complicated when it comes to estate planning, but in the era of digital currencies, it has gotten slightly more so. Here, we'll explore some estate planning considerations regarding digital assets.
Key Takeaways
- Cryptocurrencies are considered property, so they are treated as such for estate planning.
- Your heirs and executors should understand how to access and use cryptocurrency.
- Maintaining records is critical regarding cryptocurrency so that your executor can pay accurate taxes if needed when the estate is distributed.
Cryptocurrencies Are Property at Tax Time
The most important factor to consider when leaving cryptocurrency to your heirs is that as of December 2024, the Internal Revenue Service and state tax offices consider digital assets to be property. This means you're taxed depending on when you received the asset, how you received it, and when you realize gains or losses (as income or capital gain or loss).
Thus, you should record when you acquired your assets, how you acquired them, and their fair market value at the time you acquired them. A record that details this information will allow your executor to properly account for their adjusted basis and report and pay any taxes due from your estate. In fact, the Internal Revenue Service requires taxpayers to record their transactions, and starting in 2026, the IRS and taxpayers will receive Form 1099-DA from brokers reporting transactions.
Fast Fact
Non-fungible tokens are also considered property for tax purposes, so tax rules also apply to them.
If you have a large estate or have maxed out your lifetime gifting amount, your digital assets may be subject to federal gift taxes. If your state has any inheritance or gift taxes, they might be subject to them as well.
Cryptocurrency Requires Understanding
Another important consideration when estate planning with cryptocurrencies is ensuring that the executor of your estate knows which digital assets you hold, how to access them, and where your private keys are. Using the keys to transfer these assets is how new ownership is granted, so it's essential to ensure your executor and heirs have the information they need to access them.
Cryptocurrency investors are notoriously fickle about how they store their wallet passwords and private keys. Digital wallets have passwords to access them, and the wallets store the private keys required to use the assets. Your heirs need to understand that a wallet is required in order to accept the transfers, and the executor should understand how to initiate the transfers after gathering your private keys. Your heirs should also know how to store the keys to their inheritances securely.
Determine the Correct Amount of Caution
Regarding security, keep in mind that if you're too tricky, you run the risk of making it too difficult for those who inherit your tokens. But if you're not cautious enough, you run the risk of having your keys stolen or, worse, lost or misplaced. If keys are lost, they are impossible to recover, and a lost wallet full of cryptocurrency private keys can be more infuriating than having them stolen—for example, one man claims to have had about 8,000 bitcoins accidentally tossed into the trash on an old hard drive when he asked his ex to throw out the trash in 2013. He has been petitioning the city for access to the landfill ever since and has even filed a lawsuit against the city council.
With security and foresight in mind, crypto asset inheritance plans should include written instructions detailing where and how the assets are stored and exactly how to access and transfer them. The instructions and storage devices should be stored in a safe or deposit box.
A Checklist for Estate Planners
Laws regarding cryptocurrency and digital assets in estate planning are still being developed and implemented. To simplify the process for your executor and heirs, consider the following steps to ensure your digital assets are accessible and accounted for when you pass:
- Keep updated records of transactions: When you acquired each asset, how much you paid, and when you divested or used any assets and their values. This is something that should be done for tax reporting purposes anyway, so knock out two birds with one stone here.
- Maintain and update access instructions: Anytime there is a change, make sure you update your records with dates, amounts, times, and even to whom you transferred assets.
- Account for taxes that will be owed when assets are transferred: Depending on your state, there may be inheritance taxes if the assets exceed specific values. Federally, if you've exceeded your lifetime gift tax exclusion, taxes might be due (although this is very high—$13.61 million in 2024 and $13.99 million in 2025).
- Make sure the assets are included in your will or trust: Include the assets and how you'd like them distributed in your will.
- Letters of instruction: To help your heirs and/or executor find and access your digital assets, consider writing detailed instructions for each one. These should be stored somewhere secure and private.
Does Cryptocurrency Go Through Probate?
Cryptocurrency is considered property, so it is part of the probate process.
Is There a Crypto for Real Estate?
There are real estate tokens on the market, but in most cases, they don't represent actual property. Real estate tokens representing property are considered securities in the U.S. and must comply with federal and state securities laws. Thus, they should only be available on registered exchanges, and the companies offering them must register them with the appropriate regulatory authority.
How Do Crypto Millionaires Cash Out?
To exchange cryptocurrency for cash, you must use a centralized exchange. Cryptocurrency millionaires must also use these exchanges to access their cryptocurrency.
The Bottom Line
Estate planning is a complicated process in which all assets must be considered. Cryptocurrency holders must additionally consider their holdings' accessibility, security, and their heirs' knowledge and abilities when planning. Because of the complications added by cryptocurrency, it's best to consult an estate planner familiar with cryptocurrency and its tax implications when setting up your estate plan.
