In August of 2020 Bitcoin surged in value to more than $11,000. Though this does not beat the $20,000 Bitcoin achieved in 2017 and it has fallen back to since then, it does show that Bitcoin is a valuable asset that more and more people own. It is estimated that 25% of individuals between the ages of 24 and 38 own one or more cryptocurrencies and a growing number of mainstream business such as Whole Foods
Here are a few of the points where planning for the use and succession of ownership of cryptocurrency is important.
- Security. Cryptocurrency is highly secure, but that security is in jeopardy if the private key or seed phrase is carelessly recorded. With the right private key or seed phrase, anyone can access the cryptocurrency, so planning and procedures have to include how to secure this information.
- Privacy. Like cash, cryptocurrency is not traceable. There is no electronic or paper trail linking the parties together in a transaction involving cryptocurrency. To preserve that privacy, you will need to plan that other documentation in the transaction does not reveal these identities, or at least that information is privileged.
- Shorter transfer delay and lower costs. Unlike hard currency, transferring cryptocurrency takes only moments and there are few, if any, transfer costs. Care needs to be taken that the entities that are used in planning do not end up re-creating the delays and costs of hard currency.
- No access without private key or seed phrase. Without these pieces of information, the cryptocurrency is as lost as tossing gold into the ocean.
- Value fluctuation. Cryptocurrency, like precious metals and other commodities, can fluctuate wildly even during the course of a day. Making gifts of cryptocurrency can consume unified credits for what is, in the long run, worth much less or much more than intended.
- No regulation. Since cryptocurrency exist outside of government regulation, no government is responsible for losses incurred by scams, theft or other malfeasance. Other sources of security are needed to insure against loses like those incurred in the Mt. Gox bankruptcy resulting from the theft of 850,000 bitcoins worth approximately $450 million.
Trusts and other traditional planning techniques have a hard time owning cryptocurrency, especially if the Prudent Investor Rule applies. Without specific language, the trust will not be able to hold cryptocurrency, but if that language is written too broadly, the trustee may be exempt from damages due to willful neglect.
Cryptocurrency is treated as property rather than as currency by the IRS for tax purposes. This means that the fair market value is set by conversion into U.S. dollars at “a reasonable exchange rate” and transactions involving cryptocurrency are subject to the capital gains tax regulations. This requires specific tax provisions to be drafted into trusts, partnerships, LLCs and other entities.
If you, or your business, own substantial (more than $100,000) worth of bitcoin or any other cryptocurrency, your estate, business succession and financial planners need to review and revise your documents to take into account the unique aspects of this asset. Otherwise, your heirs may be like James Howells of Newport Wales who has unsuccessfully sifted through a mountain of garbage searching for his discarded computer hard drive containing his 7,800 bitcoins, now worth more than $85 million.