In the modern era, cryptocurrency is having a heyday. With exceptional value growth from Bitcoin to Dogecoin in recent years, more people than ever are considering the potential of digital currency in their own attempts to build multigenerational wealth.
But a question lingers for many would-be investors: can you inherit cryptocurrency?
This question may make the difference in the investment avenues that would-be crypto purchasers decide to take. For anyone wanting to build wealth that outlives you, the inheritability of an asset is vital.
In this article, we’ll explore just how inheritable cryptocurrencies are, how they differ from other assets, and how you can best ensure that your crypto assets are passed down to your inheritors.
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Can You Inherit Cryptocurrency?
To best answer this question, it helps to first explore the ways that many jurisdictions define what cryptocurrencies are in terms of taxation and financial management.
In North America, for example, cryptocurrencies are, for the most part, defined as a purely digital assets. What does this mean? Well, simply put, this means that, like any other real asset (such as property), cryptocurrency is recognized as a real and valuable source of liquidity.
Here’s how the Internal Revenue Service (IRS) puts it: “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”
So, like all other assets, cryptocurrencies are forms of wealth that you can and should be able to pass down to whomever you designate upon your death. While you may not want to think of it now, financial planning for your postmortem can help set your loved ones down a thriving financial path. Crypto can be a big step on that journey.
As a clearly defined real asset, cryptocurrency stands among other inheritable values, including:
- Stocks and bonds
Because the value of cryptocurrency cannot be denied, these investments—just like any kind of stock or bond—can be transferred upon the settlement of an estate and the provisions of a will to a new owner.
Upon death, the decedent’s assets are divided and allocated according to the will through a probate process. Without a will, a court-appointed administrator will do the work, allocating assets per local legislation.
Right now, only six states have a mandated inheritance tax, meaning if you live in any one of these, you’ll have to consider that some of your cryptos might be taken by the government. As a result, your heirs will end up with less of your assets.
These are the states with inheritance tax legislation:
- New Jersey
However, the specifics of inheritance tax regulation in each of these states differ. For example, children and grandchildren are exempt from inheritance tax in every state but Pennsylvania and Nebraska. Exemptions vary, so find out the details of your local regulations when planning your post-mortem crypto distribution.
Additionally, as you plan the distribution of your assets, it is important to recognize exactly how crypto differs from other assets and the specific roles that fall on digital assets.
How Crypto Differs from Other Assets
In the United States, the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) sets the rules and regulations that dictate digital accounts. If you want to make sure that others can inherit your cryptocurrency assets, it is essential to understand these rules.
As we mentioned, cryptocurrency isn’t defined as a currency specifically. Rather, it’s treated legally as a digital good. This also means that, unlike liquid assets, the beneficiary designation that you’ve set up for your online account has more power over your digital assets than anything in your will or trust.
This translates to as the ultimate ownership of an account coming down to the Terms of Service Agreement (TOSA) you accepted when making your cryptocurrency exchanges. The service provider or custodian of your cryptocurrency wallet then has unique rights over the account depending on the status of the RUFADAA in your state, as well as the TOSA.
The service provider can give either full or partial access or provide a data dump of the requested information. The ability of your inheritors to then access your digital assets depends fully on what you’ve planned and what you’ve agreed to in the management of your crypto.
Then, it’s essential to keep hold of your private keys. Without those keys, access to your cryptocurrency could be lost forever.
Unlike physical assets, there may be no recovery of the value of your cryptocurrency wallet if your heirs do not have the keys. While it may be possible to coordinate with your service provider for account information access, it all depends on the agreements you made and the availability of your crypto passwords.
Guaranteeing that your crypto assets are inheritable will take proper planning and attention to detail.
How to Guarantee That Your Crypto Assets are Inheritable
For the benefit of your heirs, ensuring the inheritability of your cryptocurrency assets will take an incredible amount of stress off their shoulders. After all, handling the finances of a lost family member is already incredibly difficult. It requires asset, beneficiary, estate, trustee, and will considerations in a process that can be time-consuming and difficult at best.
To guarantee that your crypto assets are inheritable, you need to take the steps while you’re still alive to ensure the handing down of these currencies is a more or less straightforward process.
These are the steps that you can take to make your crypto someone’s inheritance:
- Keep track of your crypto keys.
As we mentioned, the ability of your heroes to access your crypto accounts through your personal keys is essential to them being able to take control of these assets. Make sure these keys are findable, whether you track them in a digital crypto wallet or transfer your data to a hard wallet in the form of an encrypted external hard drive.
- Track exchanges, including taxes that might occur from a sale.
The way your crypto assets are managed will dictate the taxes owed to them. For example, if the value of your cryptocurrency rose substantially by the time of your death, your heirs may be able to pocket the increased value without paying taxes on the gains.
However, a taxable event will occur if you sell these assets before your death. Track all your exchanges to ensure taxes are paid up.
- Update your legal documents.
Ensure that your will and trust documentation are properly aligned with your desires and changing regulations. For example, the RUFADAA created a new set of rules in terms of fiduciary access to digital accounts. Adjust your will and any other legal documents to smooth out any potential issues.
- Stay up-to-date on local regulations.
Per the previous step, ensure that you’re staying caught up with all the new regulations that come into play regarding cryptocurrency, estates, and inheritance regulations. These regulations will depend on your country or state and will be vital for determining how your crypto is passed down.
- Consider how estate taxes come into play.
Finally, don’t neglect how estate taxes will affect what your inheritors end up receiving. As a digital asset, your cryptocurrency can still be assessed as part of your overall estate and therefore taxed upon your death in the states in which these regulations apply. Keep up-to-date with estate tax provisions in your location to better plan the future of your digital assets.
Why Passing Down Crypto is Key to the Currency’s Future
Cryptocurrencies have been seen by many to be a democratization of financial opportunities. In a system in which the rich tend to get richer because of various tax loopholes and access to multiple income streams, the expansion of cryptocurrency can play a role in creating more social and economic mobility for people of lower economic status.
Especially in the modern age in which many cryptocurrencies can be acquired with low overhead investment, accumulating these assets and planning for the future can give you the tools to support your family towards generations of financial security. Understand how cryptocurrencies can be passed down, then make a comprehensive plan to secure the future of your family’s digital wealth.