How Do You Pass on Cryptocurrencies?

Just how do you handle digital assets?

Advancing technology has brought us digital assets and they most likely are here to stay. Therefore, cryptocurrency investors need to know how to pass on those assets through the use of estate planning, according to ThinkAdvisor, in  “4 Key Steps for Estate Planning with Cryptocurrencies.”

Here are a few facts about cryptocurrency assets:

Record Private-Key Custody and All Access Details. Digital currency is not the same as bank or investment accounts. The information can be lost permanently, if the investor fails to share the access information. Here’s what needs to be shared for most cryptocurrencies:

Private Key – A public-private key system is used to ensure transactional validity. The public key becomes public every time the cryptocurrency is bought and sold but only the owner knows the private key. This is used to verify ownership and access accounts. A physical record of the key must be created and maintained. Keeping it in a bank safety deposit box or home safe insulates the private key from hacking.

Passwords – Investors who do not secure their digital assets in “hardware wallets,” often have their cryptocurrency stored on default digital wallets provided by an exchange. The owner must share their user name, password and security question information with the exchange, so that digital assets can be retrieved.

Two-Factor Authentication – Many exchanges require investors to use two-factor authentication, usually via a mobile app that provides a unique time to gain access. User name, password and security system must be recorded for anyone else to access.

Use a Hardware Wallet. Once digital currency is purchased on an exchange, it is automatically stored on the exchange’s default wallet so the investor can access them. However, these default wallets are susceptible to hackers. Investors should immediately transfer their currency to a hardware wallet. Purchased online, they are generally encrypted flash drives that require a password or PIN code to gain access. If you lose that flash drive, or password or PIN code, you may have lost all the assets. However, some hardware wallets support 24-word recovery phrases to help investors restore their accounts. Investors are advised to buy a secondary hardware wallet and make an exact duplicate to have another means of access.

Uniform Fiduciary Access. Roughly 24 states have passed some version of the Uniform Fiduciary Access to Digital Access Act. These laws empower fiduciaries to manage digital assets. However, they may not yet provide that same level of power for cryptocurrencies.

Determine Tax Liability. The IRS treats digital assets as property, rather than currency for tax purposes, so any capital gains or losses in digital asset transactions must be reported. Many online digital asset exchanges provide data that tracks sales and purchases. However, they don’t always provide enough information to determine the tax basis. Record and save information on every transaction to be able to do the calculations on your tax liability.

Reference: ThinkAdvisor (Oct. 22, 2018) “4 Key Steps for Estate Planning with Cryptocurrencies”