Cryptocurrency and Your Estate Plan

The IRS 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. However, it does not have legal tender status in the United States. Cryptocurrency is defined as a type of virtual currency that utilizes cryptography to validate and secure transactions digitally recorded on a distributed ledger, such as a blockchain.

In general, the IRS treats all cryptocurrencies as property for tax purposes, without regard to the terminology used and without making distinctions between different types of cryptocurrencies. It is important to keep records of your cryptocurrency transactions.

Gifts of Cryptocurrency

If you make a gift of cryptocurrency, you generally have made a gift subject to federal gift tax equal to the fair market value of the cryptocurrency. However, gifts to your spouse generally qualify for a marital deduction, and gifts to a charity generally qualify for a charitable deduction. The gift may be sheltered from gift tax by the annual gift tax exclusion and the applicable exclusion amount. Gifts to someone who is two or more generations younger than you could also be subject toGST tax. The gift may be sheltered from GST tax by the annual GST tax exclusion or the GST tax exemption.

If you receive cryptocurrency as a gift, you do not have taxable income. Your basis in cryptocurrency received as a gift depends on whether you have a gain or aloss when you sell or dispose of it. For the purpose of determining gain, your basis is equal to the donor's basis, increased by any gift tax the donor paid on the gift attributable to appreciation of the property, but not to exceed the fair market value at the time of the gift. A similar adjustment to basis may also be made for GST tax paid on the gift. For the purpose of determining loss, your basis is equal to the lesser of the donor's basis or the fair market value of the cryptocurrency when you received the gift.

Charitable Gifts of Cryptocurrency

If you donate cryptocurrency to charity, you do not recognize income, gain, or loss from the donation. If you itemize deductions and have held the cryptocurrency for more than one year, your income tax charitable contribution deduction is generally equal to the fair market value of the cryptocurrency at the time of the donation. If you itemize deductions and have held the cryptocurrency for one year or less, your deduction is equal to the lesser of your basis in the cryptocurrency or the fair market value of the currency at the time of the contribution. The amount of your deduction may be limited to certain percentages (generally, 30% or20%) of your adjusted gross income, with disallowed amounts carried forward for up to five years.

If you are claiming a deduction of $250 or more for the cryptocurrency donation, you should get a contemporaneous written acknowledgment from the charity. If you are claiming a deduction of more than $5,000, you should also get the charity to sign IRS Form 8283, Noncash Charitable Contributions, acknowledging receipt of charitable deduction property. In addition, if the property is valued at more than $5,000, a qualified appraisal may be required, unless the cryptocurrency is publicly traded and readily valued. In this case, the charity is also required to report the sale, exchange, or other disposition of the contributed property by the charity within three years of its receipt, including the amount received on the disposition.

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Cryptocurrency Held at Death and Inherited Cryptocurrency

Cryptocurrency you own when you die will generally be included in your gross estate and subject to federal estate tax. Property transferred to your spouse will generally qualify for the marital deduction, and property transferred to charity will generally qualify for the charitable deduction. An applicable exclusion amountmay be available to shelter part or all of your estate from estate tax. A transfer to someone who is two or more generations younger than you could also be subjectto GST tax. The transfer may be sheltered from GST tax by the GST tax exemption.

If you inherit cryptocurrency, you generally receive an income tax basis stepped up (or stepped down) to fair market value at death. If you later sell thecryptocurrency, you will generally recognize a long-term capital gain or loss equal to the difference between your adjusted basis in the cryptocurrency and the amount received in exchange.

However, the income tax basis of assets such as cryptocurrency would not be stepped up (or stepped down) to fair market value if held in an individual retirement account (IRA) or other retirement plan at death. In general, distributions from a retirement account are included in income when distributed and taxed as ordinary income (except to the extent attributable to nondeductible contributions). Thus, capital gains treatment is not available for cryptocurrency held in a retirement account. However, qualified distributions from a Roth retirement account are not subject to income tax.

Tax and Other Records for Cryptocurrency

You must maintain records that are sufficient to establish the positions you take on tax returns. For example, you should maintain records documenting receipts,sales, exchanges, or other dispositions of cryptocurrency; your basis; and the fair market value of cryptocurrency.

You will generally need to have any information needed to identify and access the cryptocurrency (e.g., the specific unit's unique digital identifier such as a private key, public key, and address) available for your own use, as well as for anyone who may need it in the future (e.g., the executor of your estate).

Cryptocurrencies are not a traditional investment, are highly speculative instruments, carry a significant amount of risk, and are not suitable for all investors. Cryptocurrencies are not typically subject to the same reporting and data integrity requirements that apply to more traditional investment products. Cryptocurrencies lack many of the regulations and consumer protections that legal-tender currencies and regulated securities have.