Estate Planning with Cryptocurrency

With cryptocurrencies appearing more and more in the financial portfolios of tech savvy investors, digital currencies, such as Bitcoin and others, are complicating the way people save, invest, and plan for their futures.

What is Cryptocurrency?

Bitcoin may be the most well-known cryptocurrency, but there are more than 1,000 different types of digital currency available today. They all exist in cyberspace and are regarded by many to be a safer option than many traditional assets, as their independence from financial markets leaves them untouched by the influences often associated with other types of money, including cash.

By using a publicly accessible index based on a technology called blockchain, cryptocurrency is unaffected by world market forces or government interference. However, it does fluctuate in value—much like real estate, a traditional favorite of investors.

While some crypto owners have fallen victim to hackers or been plagued by lost passwords that make their crypto account (or “wallet”) inaccessible, many investors are nevertheless embracing the blockchain-based currency as the way of the future.

What is Blockchain?

Blockchain is a technology that is used to create a decentralized digital ledger to keep track of cryptocurrency in the marketplace. All transactions are recorded by a network of independent computers. The public nature of this arrangement serves to verify and record the authenticity of transactions without individual oversight or management. The computers use algorithms to keep track of purchases, sales, and exchanges made with digital currencies.

Users employ blockchain technology by registering for a user address that others can access to transfer money, in its digital form, to them. Anyone with your user address can make a deposit of digital currency to you. The network records the transaction into the publicly verifiable database and the payment is complete.

Cryptocurrencies and Your Estate

Though cryptocurrencies function just like cash in person-to-person transactions, when it comes to tax purposes, it is treated as property. If you hold cryptocurrency as part of your financial portfolio, it will be handled differently from the rest of your wealth.

For example, if your estate includes Bitcoin, converting the virtual money into cash may allow your heirs to realize certain tax benefits. However, under different circumstances, liquidation of virtual assets may result in a capital gains tax bill. These considerations should be brought to light as part of your wealth strategy, as they have the potential to adversely impact your overall plan.

Major CPA trade groups have sought advice from the IRS to clarify certain rules regarding taxation and accounting practices as they apply to cryptocurrency. Much of it remains unsettled.

Owning cryptocurrency as part of your portfolio can be a great way to take advantage of a promising new asset, but with such confusing and evolving standards, it is difficult to keep up.

The advice of an experienced estate planner can be invaluable when making such consequential decisions for your financial future.

EDITORIAL NOTE:

THIS ARTICLE SHOULD NOT BE TAKEN AS FINANCIAL ADVICE. PLEASE VIEW IT AS AN EXAMPLE OF AN ASSIGNMENT THAT EXPLAINS A COMPLEX TOPIC. IT WAS WRITTEN FOR A FINANCIAL PLANNING CLIENT BEFORE CRYPTO TOOK A TURN AND THIS ADVICE WAS PROVEN WRONG IN MANY WAYS. I SIMPLY EXECUTED THE PIECE AS ASSIGNED.