Cryptocurrency and nonfungible tokens (NFTs) have recently emerged to be an essential investment in one’s financial portfolio, despite entering the scene over 10 years ago.
Regardless of dizzying fluctuations in value, it is important to ensure that these digital assets are included in your estate plan.
Preserving Cryptocurrency: Now and Later
The overall market of individual coins hit $3 trillion in value in 2021, only to lose $2 trillion in value so far in 2022. Even with this rapid decline, Cryptocurrency is here to stay in the global financial landscape. As a product of the 2008 financial disaster, crypto holders invest because they enjoy the freedom from government and bank control.
This freedom can however, become a drawback when it comes to preserving cryptocurrency. Before including cryptocurrency in an estate plan, it is imperative to maintain digital cash on a day-to-day basis. This involves preserving passwords, digital wallets and online storage units connected to individually owned cryptocurrency. Proper preservation will avoid a disastrous situation like the one that befell a Welsh man who accidentally threw away half a billion dollars’ worth of Bitcoin. Consider the following options of preservation:
- Hot wallet: An online app that provides convenience but is vulnerable to being hacked or stolen
- Cold wallet: An offline storage device that avoids hacking but is small and easily misplaced
- Custodial wallet: A third-party crypto exchange that digitally holds your coins avoiding the risk of losing the device however, the company could freeze your funds or be the target of a cyber attack
- Paper wallet: A printed list of keys and QR codes that is safe from hackers but easily misplaced
Tax Consequences to Consider
The Internal Revenue Service (IRS) considers cryptocurrency to be property rather than currency. If an owner holds on to a unit for longer than 12 months, the IRS will determine whether or not to assess short-term or long-term capital gains tax.
Exchanging cryptocurrency for fiat currency, a government-issued currency that is not backed by a commodity, such as gold is a taxable event. Exchanging one kind of cryptocurrency, like Bitcoin for another type is also taxable. If an individual is in the business of selling or creating cryptocurrency, often referred to as mining, ordinary income tax rates will apply.
What about NFTs?
NFTs are unique digital collectible items. They are based on the concept, “I own this.” It does not matter what “this” is, just that it is valuable or may gain value someday. Various digital collectible assets can be characterized as NFTs including:
- Digital artwork
- Video clips
- Social media posts
- Gaming tokens
- Digital real estate
While being the owner of the virtual Pyramid of Giza may seem silly today, tomorrow its value could skyrocket. This brings clarity when thinking of new and emerging technologies like virtual reality, augmented reality, and metaverses.
How Crypto and NFTs Fit into Your Estate Plan
Talk to an estate planning attorney about cryptocurrency and NFTs, even if you have not yet purchased your first Dogecoin or CryptoKitty. At Fischel Kahn, we can help keep taxable events to a minimum and preserve digital assets as part of an overall estate plan while maintaining an individual’s privacy.
Nina Stillman is a veteran attorney at Fischel | Kahn who focuses on creating and executing estate plans and the related administration, taxation, and litigation of estates and trusts. firstname.lastname@example.org