According to Google Trends, the amount of people searching “cryptocurrency” or “crypto” reached an all-time high this year. However, many people do not understand the intricacies or implications of cryptocurrency. Using and investing in cryptocurrency creates considerable estate planning and tax implications.
Cryptocurrency is a form of digital currency that is used to purchase goods and services through online marketplaces. Cryptocurrency can also be traded publicly. The cryptocurrency market is currently valued at over $1.4 billion. Proponents of cryptocurrency tout its efficiency and security. Cryptocurrency is effective at increasing transaction speeds and lowering the fees that are typically associated with traditional banking. Additionally, online blockchain technology creates an immutable record of transactions in a database spread out across a vast network. However, cryptocurrency holders may only access their cryptocurrency wallet using two digital passwords or “keys.” A plan should be implemented to pass the keys to beneficiaries or beneficiaries will not gain access to a decedent’s cryptocurrency.
According to the Internal Revenue Service, while cryptocurrency is “digital” currency, it is treated and taxed as property for federal income tax purposes. It is important for families and individuals who invest in cryptocurrency to maintain accurate and detailed records of cryptocurrency investments and report income and remit taxes related to cryptocurrency transactions.
Cryptocurrency is includible in a decedent’s gross taxable estate for federal estate tax purposes and it may generate federal and state estate taxes. However, upon a cryptocurrency holder’s death, the beneficiaries of the cryptocurrency will receive the cryptocurrency at its fair market value on the holder’s date of death. The “step-up” in basis at death is the source of significant discussion and legislation was proposed that would eliminate a step-up in basis for gains in excess of value thresholds to be determined..
Cryptocurrency investors should meet with a qualified attorney to provide tax planning advice and draft an estate plan that accounts for the estate and tax issues that are inherent in cryptocurrency.
Michael Salad is a partner in Cooper Levenson’s Business & Tax practice group. He concentrates his practice on estate planning, business transactions, mergers and acquisitions, tax matters and probate administration. Michael holds an LL.M. in Estate Planning and Elder Law and is licensed to practice law in New Jersey, Florida, New York, Pennsylvania, Maryland, Connecticut and the District of Columbia.
Craig Panholzer is an associate in Cooper Levenson’s Business & Tax practice group in its Florida office. He concentrates his practice on business transactions, cyber risk management, estate planning, probate and tax matters.
Alonso Loredo is a summer associate at Cooper Levenson and a law student at Rutgers Law School. He hopes to concentrate his practice in business transactions, intellectual property, estate planning, and health law.