Protecting investments and ensuring they get passed to the right people in the unfortunate event of a death can be a complicated process when cryptocurrency is involved. After all, cryptocurrency is known for decentralization and security; if only you are meant to ever have access to them, how do you ensure your assets are properly given to your beneficiaries? There are systems you can use to ensure proper handling of your digital assets, similar to a trust.
The first, and most important step, is to take care of your private key and recovery phrase. We’ve seen plenty of horror stories where digital assets are lost because there were no backups of private keys or recovery phrases. To clarify, your private key is essentially the password to your cryptocurrency wallet; it allows you to access it, and nobody else. Your recovery phrase was likely shown to you when you created the wallet. It allows you to recover a lost wallet by entering the phrase, which regenerates your private key. If you were to lose both of these, your wallet would become completely irrecoverable.
How do I make sure my digital assets are properly passed on?
If you’ve made it past the first step and taken the proper precautions to keep your private key and recovery phrase safe, you can use those to pass down your assets. There are a few methods by which you can do that. First, you can use a dead-man switch: a piece of software that will ask you to confirm your identity via a password once every week or so, and if you are unable to, it will automatically pass your private keys and recovery phrase onto your beneficiaries.
If that sounds complicated, there’s a simpler way. Similar to other assets or crucial personal information, you could keep a copy of these keys in a safety deposit box, then pass that box onto your beneficiaries. This could be safer in the case that you forget to authenticate your dead-man switch, or are simply unable to due to time constraints.
Do I have to pay taxes on my digital assets?
The current tax code on cryptocurrency is not yet fully established, but steps are being taken to treat cryptocurrency similar to securities. At the moment, you won’t receive a 1099 form as you would from a brokerage. However, starting in 2023, the IRS will require you to report cryptocurrency investments similar to the 1099 form for securities. This doesn’t mean, however, that your digital assets are not subject to taxes. At the moment, digital assets are treated the same way as regular capital gains, so if you sold your cryptocurrency for a gain this year, you will be taxed on it. Thankfully, if you’ve had a bad investment year, this also means you can claim a loss.
When passing cryptocurrency down to your beneficiaries, it is also treated similarly to other assets. This means that it’s also subject to gift taxes and estate taxes. At the moment, these tax codes are a stop-gap for more targeted legislation down the line. Expect to see new rules for digital investors in the future.
How can I create a plan for my digital investments?
If you need help creating a plan that ensures your assets are properly taken care of, Harbor Law Firm is here to help. We have years of experience in estate planning , and the knowledge necessary to help you navigate the maze of tax law surrounding cryptocurrency. Call us today at (888) 335-2815 or fill out a form on our website for a free consultation.