Cryptocurrency in Your Estate Plan

July 01, 2021 Rasti Nikolic, Associate Financial Planner
Coins West Financial Services Cryptocurrencies

Cryptocurrency is a digital or virtual currency that uses cryptography for security. Each cryptocurrency uses a unique electronic address for transfer between users’ digital wallets. The user must have a ‘private key’ to be able to move cryptocurrency. If the owner does not provide a fiduciary with a ‘private key,’ the cryptocurrency is inaccessible by anyone upon the owner’s incapacity or death. This is known as a “black hole” wallet because the cryptocurrency becomes inaccessible and essentially worthless. Cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency is that it is not issued by any central authority. The downside of cryptocurrency is that it can be used for illegal activities, the exchange rate is volatile, and there may be vulnerabilities associated with its underlying infrastructure. The upside is its portability, divisibility, inflation resistance, and transparency.

Many cryptocurrencies are decentralized networks based on blockchaintechnology. The most popular and first blockchain-based cryptocurrency, Bitcoin, was developed ten years ago. As Bitcoin developed, hundreds of other virtual currencies, collectively referred to as Altcoins, also launched. Some other popular cryptocurrencies include Ethereum, Ripple, Dash, Litecoin, EOS and Zcash. Per, there are over $18.6 billion of Bitcoins in circulation with a total market capitalization of approximately $600 billion. The aggregated value of all cryptocurrencies is approximately $1 trillion.

If you own Bitcoins, or any cryptocurrencies in general, consider the following planning points: 

  1. Personal Property – from the IRS’s perspective, virtual currency is treated as personal property for federal tax purposes (like a car or a painting). The sale or purchase of Bitcoins used to pay for goods and services are examples of transactions which can be taxed.
  2. Beneficiaries – since Bitcoin is held anonymously, there are no beneficiary designations available. So, how do you pass Bitcoin information to a trusted representative? Your representative must have a ‘private key’ (or username/password, depending on the wallet host) in order to access and distribute Bitcoin per your estate plan. If you are the only person who has access to the ‘wallet,’ Bitcoin might be forever lost in the network. 
  3. Will or Trust – if you die with a large reserve of Bitcoin, it could be considered an ‘investment’ that your trusted agent could be required to sell and/or diversify. While preparing your will or trust, consider including specific language providing direction to the executor/trustee regarding their responsibility to manage and diversify your Bitcoin. 
  4. Taxes – if the Bitcoin is retained by your executor/trustee, it will not be considered income to the estate.  However, like other investment assets, it can appreciate in value, and be sold later for a capital gain. At the time of sale, any gains are taxable to the estate and/or beneficiary.  
  5. Fair Market Value – since Bitcoin is considered personal property, valuation step-up or step-down in basis (at the fair market value) will be based on the value of Bitcoin at the date of your death.

To ensure that your loved ones can inherit your cryptocurrencies, consider creating a memorandum which can include:

  • A digital asset inventory listing all of your cryptocurrencies that are part of your estate
  • Digital wallet information and any back-ups (i.e., type; any computer, smartphone, or device on which you have stored your cryptocurrency; online exchanges and password managers)
  • A list of usernames/passwords/pins/private key (which should be updated regularly) 
  • A step-by-step guide on how to access your cryptocurrencies

Estate planning in the case of cryptocurrency is a must, and not an option. If cryptocurrency is actively traded, there may be income tax due on trades. Further, if a fiduciary doesn’t have a private key, they may not be able to sell cryptocurrency to cover any taxes that are due. Note that individuals who die with considerable value in cryptocurrency that is not accessible upon death may still have an estate tax bill on what could be considered a worthless asset. 

Failing to plan for decentralized assets, such as cryptocurrency, may cause substantial unidentified financial burdens for a decedent’s family. Planning for incapacity or death should be the first priority for cryptocurrency owners.

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1Blockchain, based on Investopedia, is a record-keeping technology behind bitcoin. It is digital information (the block) stored in a public database (the chain). 


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