Crypto Assets in a Deceased Estate and How to Plan Ahead

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Rafael Franco

21st Oct 2024  |  5 min read

With the growing popularity of cryptocurrency in personal investment portfolios, its inclusion in estate planning has become increasingly important. Administering crypto assets in a deceased estate presents a range of unique challenges, from navigating tax obligations to addressing the technical complexities of accessing digital wallets. This guide explores the key tax considerations and practical difficulties involved, while offering strategies to ensure smooth estate management and prevent potential complications.

Capital Gains Tax (CGT) Implications for Crypto Assets in an Estate

Cryptocurrency, being a post-CGT asset, qualifies for specific exemptions when transferred after death. Under current laws, any capital gain or loss on cryptocurrency is typically disregarded when the post-CGT asset passes to the deceased’s legal personal representative or a beneficiary. This means no capital gains tax (CGT) is triggered at the time of death. Instead, the CGT event is deferred until the beneficiary sells or disposes of the asset, with the tax calculated based on the original cost base and the value at the time of disposal.

However, there are exceptions to this rule. If the cryptocurrency is transferred to a tax-advantaged entity or to a foreign resident beneficiary, a CGT event is triggered just before the deceased’s death. In these cases, the capital gain or loss must be reported in the deceased’s final tax return, and the CGT will apply based on the asset’s market value at the time of death.

Challenges of Managing Cryptocurrency in a Deceased Estate

Beyond tax considerations, there are practical challenges associated with handling crypto assets in a deceased estate. One of the most significant hurdles is accessing the digital assets. It is common for investors to store their crypto assets in digital wallets, which are secured by private keys. Without these keys, the assets are essentially lost, as there is no central authority to recover them. If the private keys are not properly secured and planned for, your beneficiaries may never be able to retrieve your cryptocurrency holdings. Therefore, it is crucial to include clear instructions and detailed access information as part of your estate planning to ensure that your beneficiaries can access and manage these digital assets without unnecessary complications or loss.

Additionally, the volatile nature of cryptocurrency can complicate the valuation of the estate. Crypto prices can fluctuate dramatically, making it difficult to determine a reliable value for probate and tax purposes. Accurate valuation at the time of death is essential for ensuring fair distribution and correct tax reporting.

The legal landscape surrounding cryptocurrency is also evolving, and there is uncertainty in how digital assets are treated in estate law. This can lead to delays, confusion, or disputes among beneficiaries if the legal framework is unclear or outdated. These challenges are compounded when lawyers do not fully understand the complexities of crypto assets, leading to further complications in the estate settlement process. Therefore, it is crucial to work with professionals who are knowledgeable about cryptocurrency to ensure that your digital assets are properly planned for and managed in accordance with current legal standards.

Steps to Safeguard Your Crypto Assets in Estate Planning

Given these challenges, it’s essential to take proactive steps to ensure your cryptocurrency is properly managed and passed on to your beneficiaries.

First, when including cryptocurrency in your will, it is crucial not to include your private keys or recovery phrases directly in the will. Wills become public documents during probate, and anyone with access to your private keys could potentially steal your assets. Instead, your will should reference where your private keys and access information are securely stored. This might be in a separate encrypted document or with a trusted individual or service. Additionally, if your beneficiaries have little knowledge of cryptocurrencies, it is wise to ensure that there is at least one person who will be involved in administering the estate (for example, the executor, your accountant or your lawyer), or at the very least a person who can be contacted for advice and guidance, who understands how to securely access and transfer crypto assets. This precaution can prevent potential unrecoverable loss and ensure that the digital assets are safely and effectively passed on to your beneficiaries.

You should also provide clear instructions in your will regarding how your digital assets should be accessed and managed. Specify whether certain assets should be sold, transferred to beneficiaries, or held for future investment. Being explicit about your intentions helps to avoid confusion and ensures that your wishes are followed correctly.

It’s essential to regularly review and update your estate plan to reflect any changes in your cryptocurrency holdings. Crypto portfolios can change frequently, especially if you are active onchain and have assets held in smart contracts that might not be easily identified by the average person. Keeping your will and estate plan up to date ensures that all assets are properly accounted for. In addition, maintaining accurate and up to date cost bases for your crypto assets is crucial for calculating capital gains or losses when these assets are sold or transferred. Incomplete or outdated records can lead to incorrect tax reporting and potential penalties. Given the complexity of crypto transactions and tax laws, working with a crypto accountant is highly recommended. A specialist can help ensure your records are accurate, compliant, and provide tailored advice based on your specific holdings.

Lastly, consider using a trusted custodial service or secure storage for your private keys. A custodial service can provide peace of mind by ensuring your assets are accessible to your executor or beneficiaries, while keeping them safe from unauthorised access. Alternatively, you could set up an encrypted backup of your private keys that is only accessible to a trusted person or service.

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While CGT exemptions can make it easier to transfer crypto assets to beneficiaries, proper planning is essential to avoid issues like inaccessible wallets, valuation complexities, and tax liabilities. By regularly updating your estate plan, ensuring accurate cost base records, and including clear instructions for managing your digital assets, you can protect your crypto investments and ensure a smooth transition for your beneficiaries.

At Tax On Chain, our forensic crypto accountants possess extensive knowledge of cryptocurrency and the related tax and accounting implications. We offer expertise in tracing and accessing digital assets, valuing crypto holdings, and calculating tax liabilities, ensuring all assets are accurately accounted for and in full compliance with the presiding regulations, facilitating a smooth transfer of assets to the estate’s beneficiaries.

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