How Cryptocurrency and NFTs Fit into Your Estate Plan
Five years ago, cryptocurrency was probably not on your radar. Today, it may be an important investment in your portfolio. You could even own some nonfungible tokens (NFTs), which are powered by the same blockchain-based technology. Despite the dizzying fluctuations in the value of these assets, you should ensure that they are included in your estate plan so you can preserve them for your heirs. Preserving Cryptocurrency: Now and Later Cryptocurrency, which is digital money, is exhibiting stability as part of the global financial landscape, even though the value of individual coins (units of cryptocurrency) has been notoriously volatile. The overall market hit $3 trillion in value in 2021, only to lose $2 trillion in value so far in 2022. Emerging from the ashes of the 2008 financial disaster, cryptocurrency is likely to retain its status as an investment option because its holders enjoy freedom from government and bank control. This advantage can become a drawback when it comes to preserving cryptocurrency. Before you consider including cryptocurrency in an estate plan, it is imperative that you hang on to your digital cash on a day-to-day basis. This involves preserving the passwords and digital wallets (storage units) connected to your cryptocurrency. This will avoid a disastrous situation like the one that befell a Welsh man who accidentally threw away half a billion dollars’ worth of Bitcoin.[1] Consider the following options to preserve your cryptocurrency: 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 a small item and easily misplaced Custodial wallet: A third-party crypto exchange that holds your coins, avoiding the risk of losing the device, although 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 Another important consideration is that the Internal Revenue Service (IRS) considers cryptocurrency to be property rather than currency. That means it is subject to capital gains tax. Whether the owner holds it for longer than twelve months determines whether the IRS will assess short-term or long-term capital gains tax. Exchanging cryptocurrency for fiat currency (a country’s official money) is a taxable event, as is exchanging one kind of cryptocurrency for another (e.g., exchanging Bitcoin for Ether). If you are in the business of selling or creating cryptocurrency (called “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. That is why various digital collectible assets, such as the following, can be characterized as NFTs: Digital artwork Video clips Social media posts Memes Gaming tokens Digital real estate While being the owner of the virtual Pyramid of Giza may seem silly today, who knows how much it will be worth tomorrow? This makes a little more sense when we think about emerging technologies like virtual […]
Read morePlanning for Your Digital Legacy
An estate plan often focuses on tangible property such as jewelry, artwork, money, and vehicles. However, in this age of technology, it is important to remember to include your digital assets. Digital assets consist of everything we own online. Because we spend more time on computers and smartphones than we ever did before, you may not realize how much digital stuff you own, from photos and videos to online accounts, cryptocurrency, and nonfungible tokens (NFTs). Why Is It Important to Plan for Digital Assets? Planning for digital assets is important for several reasons. First, without a plan, digital assets may get lost in the Internet ether and not pass to your loved ones after your death due to the simple fact that their existence is unknown. Second, planning now means your family will not have to worry about hunting for these items upon your death while also grieving a beloved family member. Third, like most adults (roughly 70 percent of them), you want certain aspects of your digital life to remain private. If you do not create a plan, your loved ones may learn things that you wish to keep secret. Finally, planning now can minimize the risk of identity theft, which happens to 2.4 million deceased Americans each year. Keep reading to learn more about why it is important to include digital assets in your estate plan and how to account for them. Digital Assets: What Are They? Instead of existing in photo albums and on videotapes and DVDs, most of our family photos and videos are now digital. Even if they lack commercial value, they certainly have sentimental value that you want to preserve for your family and friends. Social media accounts containing your photos and videos can also have value to your loved ones when you are gone. For example, a Facebook account can serve as a memorial after you pass away. When you consider all of the other accounts that you log into (more than 130 on average), the list becomes quite lengthy. Digital assets that you may own include the following: Social media accounts (e.g., Facebook, Twitter, LinkedIn) Financial accounts at brick-and-mortar and online institutions Business documents and other files stored in the cloud Cryptocurrency NFTs Databases Device backups Internet domain names and uniform resource locators (URLs) Streaming service accounts (e.g., Netflix, Peacock, Hulu) Merchant accounts (e.g., Amazon, Etsy, eBay) Gaming tokens Virtual avatars Points-based loyalty programs (e.g., for groceries, gas stations, airlines, and hotels) Rights to intellectual property, artwork, and literature Online betting accounts Monetized video content Including Digital Assets in Your Estate Plan Taking inventory of your digital assets may take some time, but it is worthwhile. If something were to happen to you, your estate planning attorney or another trusted person should have complete access to your online footprint. This includes usernames and passwords for all accounts. Tools such as Dashlane or the password manager integrated in your browser can be used to simplify the storage of usernames and passwords. In addition, you should continuously back up all digital assets, including photos and important documents, to the cloud, and […]
Read more