Cryptocurrencies: An Inheritance Minefield?

Background

If you inherited a cryptocurrency such as Bitcoin, Cardano or Ethereum would you know what to do with it? More and more people are becoming owners of digital assets but may well not have given a great deal of thought as to how they may be passed down to the next generation. Digital currencies, in particular, can be a source of considerable stress for families that have to deal with the estate of a bereaved relative.

Cryptocurrency is, in effect, digital cash stored on an electronic file and traded online. It has a ledger, balances, passwords and account numbers. It is rather like online banking but with no central bank or regulator. It also has virtual wallets which store the cryptocurrency. Ownership can be ‘pseudonymous’ and that can have implications for estate planning.

Key Issues

1). Awareness

Many people have become involved with cryptocurrencies but have given little thought to what comes afterwards.

Digital assets are growing and it is becoming necessary to think about how they may be passed on so they are not lost forever and families do not miss out.

Similar issues can apply to more traditional assets held in online-only accounts. If all correspondence is paperless and the family (or executor) does not have access to emails, there may not be a way they are going to know that the money is there.

People can simply forget to inform their relatives. There have been occasions where unfinished manuscripts have later been found on computers and suddenly heirs become the owners of valuable intellectual property. 

2). Gaining Access

Without access, information wealth is unreachable. It is vital that anyone who owns cryptocurrency puts adequate guidance in their Will or elsewhere otherwise the cryptocurrency will remain dormant.

Understandably many owners are unwilling to reveal their private key while still alive. To assist some exchanges have established policies to transfer funds to the next of kin when someone dies. Online vaults can be created where details of digital assets can be stored such as cryptocurrency access information.

Banks and other financial institutions will release assets once they have been properly notified of the death of a client and have been provided with the relevant legal documentation. However, when it comes to cryptocurrencies, without the password relevant to the wallet where the currency is held, that money will be lost.

3). Volatility

Bitcoin, the world’s largest cryptocurrency, saw an almost 60-fold increase in value over three years peaking at nearly US$20000 in December 2017 before falling to less than US$4000 a year later resulting in large losses for retail investors and concerns over whether crypto-assets were not adequately regulated. Values may well improve again in the future but volatility is likely to remain an issue until cryptocurrencies become more mainstream, fulfilling the economists’ definitional criterion of money as a store of value as well as a means of exchange.

Even if someone thinks they are leaving a particular amount to a beneficiary this might not be the case if values fall. Moreover, if the value falls dramatically due to an unjustified delay in selling beneficiaries may seek reparation for any losses.

4). Taxation

In jurisdictions, such as the UK with tax due on the value of an estate, when someone dies you have to add up all their assets and pay any inheritance tax before distributing the estate. If an asset such as a cryptocurrency falls in value not only has the value of the windfall diminished but tax will have been paid on lost money.

Australia does not have an inheritance tax but inheriting Bitcoin can be seen as akin to inheriting shares. There will be no tax at the time they are inherited, but when sold later there may be tax payable on any capital gain between purchase and sale values.  This emphasises the importance of record keeping so that beneficiaries of a Will can determine the base cost of the asset. 

5). Selling Cryptocurrencies

Digital currencies can be difficult to sell and some may have to turn to specialist brokers. In a recent example from the UK, a crypto-broker recently helped a family sell a large portfolio of various different cryptocurrencies worth more than £3m (AUS$5.5m approx.) held in a number of wallets, the online accounts where digital assets are stored. As the broker commented:

‘While you can fill in a form with a stockbroker to sell your investments it’s not easy with crypto. If you have inherited a load of currencies you have never heard of you don’t know what the best price to sell it on is and you don’t know what the best price to sell at is. With something so volatile it can mean the difference of thousands’.

What does it mean?

It has been suggested people should make a comprehensive list of all assets they own, especially those that could be at risk of being overlooked and include it as part of their Will. However, to include access codes etc could be misused if discovered.

As we highlighted in our blog If Cryptocurrencies Become Mainstream in Australia, how will they be inherited? (29th August 2018) there is no legislation regarding cryptocurrency inheritance in Australia. While there have been suggestions that account holders should write down their details and give them to their beneficiaries, if this information is lost or stolen, the beneficiaries will not be able to claim their inheritance and a safer method would involve splitting access to funds between multiple trusted parties and requiring each of their signatures to access the accounts.

Clearly, an executor must know how to get access to codes and electronic signatures and preferably has knowledge of the technology with an emphasis on enabling cryptocurrencies to be transferred to beneficiaries and avoiding delays in the administration of an estate.

Contact Us

To discuss any of the above issues please contact Szabo & Associates, Solicitors. We can offer expert advice on a wide range of legal matters including contesting, making or updating a Will and preparing a Power of Attorney. Call George Szabo on 02 9281 5088 or fill in our online contact form.