You've most likely seen articles and news segments about cryptocurrency. The most popular form is Bitcoin, but there are several others on the horizon.
For the uninitiated, cryptocurrency is a digital or virtual currency that uses cryptography for security, making it difficult to counterfeit. One of the main reasons why people and investors like cryptocurrencies is that they are not issued by any central authority—meaning that cryptocurrencies are immune to government interference or manipulation.
Cryptocurrencies, such as Bitcoin, are considered assets and should be included in your estate plan. However, cryptocurrencies are not treated the same as funds you would hold in a traditional bank. The IRS has determined that virtual currency is actually treated as personal property for federal tax purposes. That means the government will treat your Bitcoin more like tangible property you own, such as a car or antique painting.
As far as ownership, many people believe that cryptocurrencies such as Bitcoin are anonymous. This isn't exactly true. Bitcoin is pseudonymous, meaning that it is identified based on the owner's pseudonym, which is typically a user ID or email address to which you receive it. Unlike a traditional bank account, your executor can't simply contact Bitcoin and request the funds after your death. Essentially that means if you die without communicating that you have Bitcoin, it will die with you.
To avoid such a situation from happening, it is critical to develop a method for passing along the important details of your cryptocurrency ownership to an estate representative, such as your trustee or executor. You will also need to provide him or her with your “private key.” Whoever has this information will have immediate access to your cryptocurrency account, so it is important that you trust your representative and that you are specific about how the key can be obtained.
Likewise, because Bitcoin is currently considered personal property, it must be evaluated for either step-up or step-down in basis given the fair market value on the date of death. If your executor decides to retain your Bitcoin, it would not be considered income. However, if it is converted to cash, it must be declared as income on an estate tax return and be evaluated as a step-up or step-down basis. There's also the issue of capital gains if the Bitcoin appreciates in value while being held.
The future of cryptocurrency such as Bitcoin is still uncertain. Many people are “going all in” thinking it will be the wave of the future. Others are taking baby steps into this new world. But, no matter how far you go into the world of cryptocurrency, it is critical that you work with an experienced Santa Barbara will and estate attorney to make sure your investment doesn't die with you. If you have questions on how to make this happen, please contact our Santa Barbara estate planning office to schedule an appointment.