Issues with Cryptocurrency in Estate Planning
Cryptocurrency is a virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend, and relies on the utilization of blockchain technology on decentralized networks, thus minimizing government interference and centralized failure. A blockchain collects information in blocks, and when a block has reached its storage capacity, it closes and links to another closed block, forming a chain of data. By utilizing blockchain technology, a transaction becomes impossible to alter, delete, or destroy.
To purchase cryptocurrency, you must select an exchange and open an account. From there, you can purchase cryptocurrency. Bitcoin is the most popular and valuable cryptocurrency on the market, but there are thousands of cryptocurrencies, known as “altcoins”, available. Once a purchase is made, the cryptocurrency will be added to a virtual wallet, which will hold the codes to all cryptocurrency held by the account owner.
The Internal Revenue Service (IRS) has determined that cryptocurrency is property, not currency. Therefore, when a client purchases cryptocurrency, the profits from a sale are subject to capital gains tax. The capital gain may be a short-term or long-term gain depending on how long a client holds the cryptocurrency. The taxable event occurs when the client exchanges cryptocurrency for fiat currency or a different brand of cryptocurrency. If the client is in the business of selling or mining cryptocurrency, ordinary income tax rates are applicable. Due to the unique nature of cryptocurrency, planners may need to advise clients on associated issues. Specifically, although a client’s wallet exists, the necessity of a key for access can become problematic. If the client dies without revealing the key to his wallet, the funds are lost forever. Additionally, because many cryptocurrency exchanges fail to provide a mechanism to name a beneficiary, the wallet will be considered a probate asset. It is thus imperative to address how these assets shall pass and to authorize a fiduciary to access a client’s digital assets.
Hook Law Center: Hey, Neo! We hope you had a great Independence Day. Every year, there’s a lot of discussion regarding pets and fireworks. Are they truly that scary to animals?
Neo: Yes! Humans aren’t as shaken by the sounds fireworks make as they can grasp what’s actually happening – animals do not. The flashing lights and strong scents don’t help, either. According to the Kennel Club, “With multiple bangs occurring from numerous displays, dogs will rarely be able to pinpoint where the booming explosions are coming from. Not knowing what an explosion is, where it’s coming from, or where and when the next one is going to be must be truly terrifying for some dogs”. You can continue reading their article about the effects of fireworks on dogs here!