Cryptocurrency and Inheritance: What Investors Need to Know
Despite the often volatile nature of cryptocurrency, there is no denying that this form of digital currency has made huge strides over the past decade.
Once considered a fad or even a scam, the global blockchain market is now expected to be worth over 57 million US dollars by 2025. In June, the Financial Conduct Authority reported that around 2.3 million adults in the UK now hold crypto-assets such as Bitcoin.
But what happens to your crypto-assets when you pass away? In this article, we look at the practical, legal and tax and implications of leaving cryptocurrency to your loved ones.
There seems to be a growing acceptance worldwide that these currencies are now a permanent feature of the financial landscape. In Europe, governments have joined forces to begin regulating cryptocurrencies, making them more traceable. Elsewhere this year, El Salvador became the first country to classify Bitcoin as legal tender, meaning that businesses there must accept the cryptocurrency as payment for goods and services.
Attitudes to cryptocurrencies have also evolved over the past decade. According to the latest research from the Financial Conduct Authority, over half of those with cryptocurrency investments were already were considering buying more. Perhaps this explains why there are over 100 Bitcoin ATMs in London.
The report also suggested that cryptocurrency has become more ‘normalised’. Buyers now consider them less of a gamble, and are more likely to view them as “an alternative or complement to mainstream investments”.
Bearing in mind the apparent permanence of this trend, it is vital that investors think ahead to what will happen to their crypto-assets after their death.
There are currently no laws in the UK which expressly govern inheritance of cryptocurrencies. However, there are a number of practical considerations and tax implications that investors should be aware of.
The most crucial step to take is to ensure that the person appointed to administer your estate after your death is aware that you have cryptocurrency investments which should be included as an asset of your estate. Details should be included in your Will. Without this step, the asset could fall under the radar.
It is also worth noting that some cryptocurrency exchanges have policies and procedures for when an investor dies. You should check these in advance to find out what will happen to your virtual wallet.
It is equally vital to make plans to pass on the private key to your virtual wallet, along with passwords to hard drives containing the cryptocurrency. The key is a long, sophisticated code used to ensure the owner’s exclusive access to cryptocurrency held in their wallet. This must be stored securely and not shared during your lifetime.
However, arrangements should be made and included in your Will for the keys and passwords to be provided to your executor when you pass away. One method that can be carried out by a law firm is to set up a Trust for the keys and passwords to be transferred in the event of death. There are also online services such as Willsentry that can simplify the process.
In 2018, the Wall Street Journal reported that around a fifth of Bitcoin is missing due to mislaid or keys and passwords. Indeed, it is estimated that up to 3.8 million Bitcoins have been lost forever. Virtual wallet providers use incredibly high levels of security to protect wallets from being hacked by cyber criminals, and lost keys cannot be retrieved or reissued.
Without the key, the contents of your digital wallet will unfortunately be rendered permanently inaccessible.
For example, in 2019, the young founder of a Canadian cryptocurrency exchange died suddenly while on holiday in India. He is thought to have had the only key to the company’s reserves and the laptop he used to conduct his business was encrypted. As a result, thousands of customers lost investments worth a combined $215 million and the company collapsed.
In another alarming story, a Welsh man accidentally threw away a laptop hard drive containing 7,500 Bitcoins. The assets are worth approximately £210 million, at the time of writing. Newport Council have refused to allow him to excavate the landfill site due to the conditions of their licensing permit, and the chances of him ever retrieving the device look slim.
In cases involving inheritance of cryptocurrencies, the timely preparation of a valid Will containing the necessary details and arrangements would be a sensible move.
Without a Will, it is difficult to see how crypto-assets could be identified and successfully transferred to beneficiaries. However, it may be possible for the next of kin under the law of intestacy to inherit if the deceased has left sufficient records of their cryptocurrency investments. This must include, of course, the all-important wallet key and any device passwords needed to access it.
Another major consideration for inheritance of cryptocurrency is tax. The HMRC considers cryptocurrency property of the deceased for the purposes of inheritance tax and their value will be calculated at the date of death.
For more information on how the HMRC taxes cryptocurrencies, please see their guidance here.
As part of the estate, crypto-assets are treated according to the normal rules on inheritance tax. For example, a total estate of less than £325,000 is currently tax free and over that amount the tax rate will be 40 per cent. Estates left wholly to spouses are normally exempt from tax regardless of their value, and donations to charity are always tax free.
However, the value of cryptocurrency portfolios can change quickly and this could have tax implications.
It is worth noting that cryptocurrency investments can fluctuate in value and a sudden drop could result in beneficiaries paying disproportionate tax. For example, assets could be valued at a certain amount for inheritance tax purposes but could be worth half of that a week later if the market crashes. Unlike with other assets, at present there is no tax relief for this situation. This means the amount of tax payable would not be updated to reflect a fall in value of crypto-assets after death.
Some investors may consider transferring their crypto-assets into a more stable investment such as property before they pass away. In 2017, a house in Essex was bought entirely with Bitcoin in the first transaction of its kind in the UK.
More often, this involves converting the assets to GBP and finding a conveyancer who is willing to accept this method of funding. Although property carries its own tax implications, this could offer more peace of mind for a tried and tested inheritance process.
Crypto-asset investors should seek legal and tax advice to ensure that all risk has been minimised and they can leave their portfolio to heirs with confidence.
While Anglia Research do not recover lost crypto-assets, we do trace missing beneficiaries regardless of the makeup of the estate. Whether or not there is a Will, we can locate people who are entitled to inherit cryptocurrencies along with other assets to ensure that the estate is distributed correctly. Find out more by visiting www.angliaresearch.co.uk
This article was submitted to be published by Anglia Research as part of their advertising agreement with Today’s Wills and Probate. The views expressed in this article are those of the submitter and not those of Today’s Wills and Probate.