Both Sides of the Coin: Cryptocurrency and Estate Planning

While cryptocurrency is still widely known for its early origins on the dark web, its use and reputation have become ubiquitous among investment bankers, young professionals and entrepreneurs alike for its atmospheric rise over the last few months. Online companies are steadily accepting cryptocurrency as a form of payment. Cryptocurrency has become a media darling for its polarizing nature. While early adopters and tech-savvy individuals understand the hype surrounding Bitcoin and other cryptocurrencies, often referring to it as the currency of the future, renowned financial expert Warren Buffett has cheekily referred to Bitcoin as “rat poison squared”. Regardless of their opinions on the future of cryptocurrency, estate planning attorneys can’t afford to ignore the growing number of Americans who have allocated money to Bitcoin and other cryptocurrencies.

What is Cryptocurrency?

The IRS, in Notice 2014-211, defines “virtual currency” as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” More commonly, cryptocurrency uses encryption to facilitate transactions between individuals. Bitcoin and other forms of cryptocurrency, commonly referred to as “altcoin,” are examples of such a virtual currency. Other common forms of cryptocurrency include Ethereum, Ripple, Cardano and Litecoin.

If the virtual currency is one that has an equivalent value in real currency (such as the dollar in the United States), it is referred to as a “convertible” virtual currency. One example of such convertible virtual currency is Bitcoin, as it can be “digitally traded between users and can be purchased for, or exchanged into, U.S. dollars…”.

Cryptocurrency can be obtained directly as payment for goods and services, purchased directly, or mined. Cryptocurrency that is mined is the reward received as a result of one’s computer solving a complex code.

Those holding cryptocurrency do so by way of a “digital wallet,” which is stored on an individual’s computer and enables the holder to send and receive payments. To access someone’s wallet, you must have the key. If you lose the key, you lose access to your wallet.

Valuation and Tax Treatment

It is no secret that regulatory bodies have grappled with the best means to govern and oversee cryptocurrency. However, that does not mean that those holding cryptocurrency may willfully ignore the tax and valuation issues at hand. While the value of cryptocurrency is ever changing, sometimes having drastic swings to the tune of several thousand dollars a day, the IRS has issued its ruling that it considers cryptocurrency property that is subject to taxation.

Many tax planners and accountants raised initial questions about determining fair market value in cryptocurrency. The IRS answered this question with guidance that the fair market value, at least for cryptocurrencies listed on an exchange, can be determined by converting the virtual currency into U.S. dollars. One common method of determining FMV is by referencing a resource, such as, that keeps historical records of values of different cryptocurrencies on certain dates, much like an accountant or attorney might reference Yahoo Finance to determine the value of a stock on a certain date.

Further, one’s basis in cryptocurrency is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. Accordingly, upon the exchange of virtual currency, a taxpayer will realize gain or loss, as the individual would in the sale of an asset. Whether that gain or loss is treated as capital or ordinary gain or loss will, as always, depend on the nature of the asset.

Estate Planning for Cryptocurrency

Many clients may be uneasy about discussing their cryptocurrency investments, even with their estate planning attorneys. Granting someone knowledge of the unique identifier that enables an individual to access one’s digital wallet is akin to handing over your bank account online log-in and password. All estate planning attorneys should make asking about cryptocurrency holdings a routine question in the initial interview. However, if the attorney encounters pushback, a gentle reminder that if an individual becomes incapacitated or deceased without a trusted source knowing first that the client had cryptocurrency, and second, the means with which to access said cryptocurrency, those funds can be lost forever.

Wallets can be stored in a digital cloud, on a smartphone, or on a computer. An individual can have unlimited wallets, creating a living nightmare for a guardian, executor, or trustee. A fiduciary will need to know the log-in information for each wallet in order to gain access. To ease the administration process, an estate planning client can do several things to aid the fiduciary ultimately responsible for administering his or her estate and/or trust.

First, notify your agent, executor or trustee that the cryptocurrency exists, and where it exists. Can they access your holdings only through your smartphone? A cloud program? Disclose all passwords and locations and store this information on a secure device, which a person can further store at an institution.

Of course, make sure that the chosen fiduciaries are able to gain access to where you’ve chosen to store this information.

Second, closely track the quantity and value as of the acquisition date of said holdings. This will significantly ease the burden of determining basis at a later date.

When drafting, including language in a client’s Power of Attorney for Property authorizing the agent to access and disburse of any of the principal’s cryptocurrency may be appropriate. Assigning cryptocurrency assets to one’s revocable trust may help the client avoid probate. Upon a client’s death, a fiduciary can choose to hold the cryptocurrency in its current wallet, liquidate, or ultimately create a new wallet in the name of the estate or trust.

For all fiduciaries and estate planning attorneys, knowledge of Illinois’s Revised Uniform Fiduciary Access to Digital Assets Act of 2015 is critical. The Act governs the access and disclosure procedures a fiduciary must follow for all digital assets. Cryptocurrency most certainly is classified as a digital asset.

Looking to the Future

There are, without a doubt, unique challenges of valuing and administering such a complex and ever-changing asset. Not even the Securities & Exchange Commission can seem to agree on the treatment of cryptocurrency for registration purposes. While it is yet to be determined if cryptocurrency is the revolutionary currency its advocates propose it to be, or a fad whose star will fade, estate planners must educate themselves on the appropriate measures to incorporate into estate plans to ensure smooth administration for clients and beneficiaries.

1 Unless otherwise noted, all references to regulations refer to IRS Notice 2014-21, available at

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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