What Happens to my Bitcoin when I die? Estate Planning and Digital Currencies
Cryptocurrencies have gained significant popularity over the last decade, appealing to the masses due to their decentralized nature, virtual anonymity, and enhanced security.[1] For Federal income tax purposes, cryptocurrency is treated as property, and longstanding tax principles apply to all transactions involving cryptocurrency.[2] Thus, anyone who owns cryptocurrency should be treated like other assets and be addressed in an estate plan.
However, these currencies pose certain challenges for estate planning. Like securities, the value of cryptocurrencies can fluctuate with great volatility due to market pressures. In addition, the virtual currency cannot be kept in a physical bank account. This lack of physical presence poses issues if the holder did not properly take steps to track and pass on his or her cryptocurrency.
One of the reasons bitcoin is so secure is because the holder must enter a “private key” before accessing or spending it. Many people who hold Bitcoin through popular apps, such as Coinbase or Robinhood, are not even aware that they have a private key. Once the private key is lost or forgotten, there is no way to access the bitcoin, and it will be essentially out of circulation forever. This exact situation occurred in June 2021 to billionaire bitcoin investor Mircea Popescu, who drowned at the age of 41 without leaving his password behind.[3] Given the unprecedented security of the virtual currency, no court order could ever bypass the key requirement or reach the assets. As far as the world is concerned, Mr. Popescu’s $1-2 billion in digital assets are lost forever.
Given that bitcoin and other digital assets pose significant value and long-term use, an estate plan can and should include steps to pass them down to beneficiaries. As with any digital assets, one way to ensure that passwords do not get lost is to share them with a trusted person. This strategy is beneficial because it ensures independent access and management of potential lucrative assets in the event of incapacity or death. Bitcoin holders can keep their private key secured by writing it in a password manager or by even placing a written copy in a secured bank vault. Without an estate plan to track and access this hyper-secured asset, it could be lost forever. This is especially important with cryptocurrencies because, whereas there are legal mechanisms for a decedent’s estate to access bank accounts even without passwords or pin numbers, the same mechanisms may not be available for crypto currencies, as Mr. Popescu’s heirs found out.
If you would like more information about estate planning (https://www.miamifloridaestateplanninglawyer.com/estate-planning.html) for your digital assets, contact the knowledgeable attorneys Mr. Bart Chepenik, 305-613-3548, or Mr. Brad Trushin, 305-981-8889 to assist you with your estate planning needs. We are accessible days and evenings to help.
[1] https://www.nerdwallet.com/article/investing/cryptocurrency-7-things-to-know
[2] https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
[3] https://nypost.com/2021/07/02/bitcoin-billionaire-mircea-popescu-dies-leaving-lost-fortune/