Bitcoin, Tax and Self-Administering Estates
Why do you need to include crypto assets in your will?
According to Decrypt, almost 4 million Bitcoin have been lost forever – that’s 20% of the 18.5 million Bitcoin that have been minted so far. There are a number of reasons why Bitcoin, or any cryptocurrencies, become irretrievable. But one easily preventable cause is the owners of Bitcoin passing away without leaving their loved ones’ access to their digital wallet.
The problem often lies in how secure many cryptocurrencies are – traditionally, assets which can’t be found during the probate process are recovered through paper trails and bank records – for example, beneficiaries are able to recover traditional savings held in a bank account once they have a copy of the death certificate.
But this isn’t the case for Bitcoin, which can only be accessed using your personal PIN or recovery information. One famous example is Gerald Cotten, the co-founder of Canadian exchange QuadrigaCX, who passed away as the only person with access to $190 million in funds held on the exchange.
Executors who are unfamiliar with crypto may not even be aware that you own cryptocurrency, or even where to start when it comes to recovering your assets. So how do you prevent your cryptocurrency from being lost when you’re no longer around?
Protecting your cryptocurrency
You have a few options when it comes to making sure your cryptocurrency will benefit the right people if you ever pass away. With an LPA, you can even ensure your cryptocurrency is managed as per your wishes if you ever became incapacitated in the short-term.
But for your Will, you have three main options.
A letter of wishes, or memorandum
A letter of wishes is a document that can be produced alongside your Will. Unlike a Will it is never on the public record, and can be updated at any time, making it a great option for recording where your crypto is held, and instructions on retrieving it. You should never put sensitive information such as passwords and account numbers in your Will, so a letter of wishes is a great option. This would work particularly well if your crypto is stored on a hardware wallet with your private key included – stored of course in a safe or safety deposit.
A Trust
A will trust is simply a way of setting up your assets so that they get passed on to particular people if you pass away. One of the advantages of putting your cryptocurrency into a trust is that your trust successor will have access to your assets immediately, unlike a will, where your beneficiaries won’t have access until the probate process is complete.
Cryptocurrency inheritance solutions
You may have seen companies selling crypto-specific wills, which are usually stored digitally and don’t cost as much as a full, comprehensive will. This is the solution least tested in Court – but you could set up a separate inheritance solution for your crypto if you choose to. However, this should only be used for the simplest cryptocurrency estates, and it is often easier and cheaper not to separate your crypto investments from your other assets such as your home or car.
Crypto and tax
Aside from making sure your crypto will benefit someone of your choosing if you pass away, including cryptocurrency in your estate plan is important for managing the amount of Inheritance Tax your beneficiaries have to pay.
While HMRC is currently reviewing the way crypto-assets are regulated, at the moment, cryptocurrency held as investments is subject to both Inheritance Tax and Capital Gains Tax. The amount of tax you have to pay will depend on your circumstances, and there may be ways you can plan your estate in order to make it more tax efficient. Speaking to a professional about this and getting a personalised estate plan means you will have the best protection possible.
The future of estate administration?
Blockchain technology is a revolutionary way of storing and securing all types of information, including, through one Denver-based start up, Wills. Blockchain Apparatus has developed a product which essentially self-administers your estate – details of your assets and beneficiaries are stored on the blockchain, and then once your death is registered with the US government, they are automatically distributed according to your will.
Of course, this technology has not been widely adopted, but it does indicate that the relationship between crypto currency, blockchain technology and personal affairs will continue to evolve.
Making sure your crypto-assets are as equally secure as your tangible assets with a full estate plan seems like the obvious choice then, as cryptocurrency continues to grow in popularity. Our Legacy team can help you create a Will that protects all of your assets without compromising their security.
