Cryptocurrency investors do everything they can to protect their holdings. Crypto enthusiasts typically use hot and cold wallets, trusted crypto exchanges, and complex cryptographic keys to protect digital assets from theft and other dangers. But what happens to these crypto holdings when their owner dies?

If a person who owns cryptocurrencies dies without a will and without giving instructions on how to access those holdings, the short – and unfortunate – answer is that they are lost forever. According to some estimatesapproximately 20% of all Bitcoin tokens are lost and unrecoverable.

If you are a crypto investor, it is essential that you take steps now to ensure that any digital holdings can be safely transferred to your heirs.

Cryptocurrency as a digital asset

In the US, cryptocurrencies are considered by the IRS to be digital assets, and more specifically, convertible virtual currencies, meaning the government treats crypto-tokens as property and not as currency. This has a variety of tax implications and also impacts how cryptocurrencies are treated in matters involving inheritance and transfer of property.

Given their status as digital assets, the US government views cryptocurrency tokens more akin to stocks or tangible property like artwork and jewelry than to cash. This means that crypto holdings are potentially subject to capital gains tax.

Essential to planning the transfer of ownership of crypto holdings is understanding usage the wallets. These apps help secure digital assets and facilitate transactions between crypto investors. These are typically secured using both an address and a public key (a way that the wallet can be publicly identified so that other wallets can transfer in tokens, for example) and a private key (a secure password usually only available to the wallet holder).

In many cases, wallets are provided by crypto custodians such as digital asset exchanges and can be accessed through their interfaces. Otherwise, non-custodial wallets can be accessed using the private key or a mnemonic phrase.

Cryptocurrency Challenges in Estate Planning

Since cryptocurrency is not treated like traditional money by the IRS, it makes the process of estate planning and legacy involving digital tokens more complex. Because the government considers cryptocurrencies personal property, you may need to specifically name a beneficiary to inherit your cryptocurrency investments.

Crypto may also be subject to different ownership and transfer fees. When the beneficiaries of your crypto holdings use those tokens as a payment method or go to exchange them for fiat currency, it will likely trigger a tax event and they will have to calculate capital gains or losses, for example. If you give crypto as a gift, it will not be recognized as income until it is sold or exchanged.

How to make sure your beneficiaries inherit your cryptocurrency

While a will and a detailed, written plan for transferring ownership of digital assets are extremely helpful for your next of kin, it’s critical to remember that this is not enough. While a will may legally make it clear that, say, your children own your crypto assets, this is not in itself a guarantee that they will be able to access and use those assets.

Chris and Charles BrooksThe CEO and CTO of CryptoAssetRecovery.com, explained that there are several other steps investors should take to facilitate a smooth and complete transfer of cryptocurrency ownership. These steps include:

1. Inform your heirs

“Make sure your loved ones — or at least your lawyers — know you have crypto.” The father-son team that runs the digital asset recovery service suggested that communication is an essential first step, as beneficiaries will be powerless without knowing that you have crypto holdings and in which wallets they are stored.

2. Document backup (and secure!).

“Record catchphrases or other backups, store them securely, and share them with people you trust.” Documenting how to access your wallets is also essential. However, keep in mind that anyone with this information can access these tokens, so it’s vital to keep your documentation safe.

3. Test your recovery seeds

While you still have access to digital wallets, test recovery seeds to make sure they will work for your next of kin and that they are linked to the appropriate wallet containing the assets you want to transfer.

4. Build in redundancy

“Consider upgrading plans using secret sharing and/or multi-signature techniques to share partial backups with multiple people.” Building redundancy into your cryptocurrency management practices will help protect it from theft during the transfer process to a payee.

5. Consider using an escrow service

The Brooks said that while some crypto investors shy away from custodian services because of the history of hacks targeting these companies, “the benefits are that these custodians have extremely robust security practices and systems in place for transferring assets into your ownership after death”. When working with a guardian, beneficiaries should be prepared to provide documents, including a copy of your will, probate documents and proof of identification.

6. Don’t rely on current technology

The Brooks suggested that crypto investors avoid using mobile phones as a backup method, as the phone you are using may be dead or the wallet app you are using may be down by the time a transfer is needed. Similarly, some of the the most popular crypto wallets today it may no longer be supported by the time of your transition.

Estate planning for cryptocurrency investments should also include preparations for someone from a fiduciary or executor role that is appointed to protect control of those tokens for a period. Suzy WalshAmerican College of Trust and Estate Council Fellow, explained that crypto investors should be especially careful when selecting a fiduciary.

“Trustees should keep things safe and manage them … they shouldn’t hold volatile assets,” such as crypto tokens, she said. She added that fiduciaries are not equipped to manage and keep cryptocurrency safe.

On the other hand, investors can take advantage of the volatility inherent in the cryptocurrency market when it comes to fees. By offering tokens at a time when values ​​are low, for example, investors can minimize transfer fees. Ideally, a fiduciary should also be comfortable with this aspect of cryptographic management.

conclusion

The various security measures used to protect crypto holdings can unfortunately make it difficult for an investor’s relatives to access. To protect your assets while also making sure you have a plan in place for them after you die, take the time to include them in your will, designate beneficiaries, communicate clearly with those beneficiaries about what you own, and how they can access it and secure documentation, including wallet addresses and private keys or custodial passwords.

If you expect to appoint a fiduciary, take care to ensure that person is well versed in cryptocurrency and is prepared to navigate volatility and security issues while overseeing your holdings.