1. Record Private-Key Custody & Other Access Details
Unlike bank accounts that can be accessed postmortem, access to digital assets typically requires a
variety of private information. This information — and an investor’s digital assets — may be lost
forever if an investor fails to record it or share it with a trusted third party before they die.
To avoid this, it is crucial that investors physically record the following private access information
and provide for custody of this information to their estate representatives:
Most cryptocurrencies use a public-private key system to ensure that transactions are valid. While
the public key is made public every time the investor buys or sells cryptocurrency, only the investor
knows the private key.
Private keys are essential to verify ownership and access digital assets and should be recorded.
Gaining access to a private key is similar to gaining ownership of a bank account so it is vital that
private keys are kept safe.
Creating a physical copy of a private key and securing it in a bank safety deposit box insulates the
private key from hacking and may provide the safest means to protect it.
Cryptocurrencies are traded on online platforms commonly known as exchanges. Investors that fail
to secure their digital assets in hardware wallets — discussed below — typically have their
cryptocurrencies stored on default digital wallets provided by an exchange.
It is important that the username, password and security question information for exchanges be
recorded to retrieve digital assets from exchange wallets.
Many cryptocurrency exchanges also require that investors use two-factor authentication to prove
their identity when accessing their account and transferring digital assets.
Two-factor authentication is typically accomplished via a mobile application that provides a unique
code to be entered into the exchange. Investors who use two-factor authentication should be
advised to record their username, password and security question information.
2. Move Custody to Hardware Wallets
Once cryptocurrencies are purchased on an exchange, they are automatically stored on that
exchange’s default wallet where they can be accessed electronically by the investor.
Digital wallets, especially those used by exchanges, are susceptible to hacking. Investors should
transfer their digital assets to a hardware wallet.
Hardware wallets can be purchased online and are, generally, encrypted flash drives that require a
password and/or PIN code to be accessed.
Investors and their heirs may lose their digital assets if their hardware wallet is lost or damaged.
Many hardware wallets support 24-word recovery phrases that help investors restore their accounts
if they forget their password and/or PIN code or their hardware wallet is lost, stolen, or damaged.
Investors should purchase secondary hardware wallets and initialize those wallets to be exact
replicas of their primary hardware wallets to provide redundant protection to their digital assets.
Investors should record the 24-word recovery phrase, PIN code, password and other access
information for their hardware wallets and provide for custody of the information and any wallets in
3. Review Uniform Fiduciary Access
To date, at least 24 states have passed some version of the Uniform Fiduciary Access to Digital
Assets Act, or UFADAA. While such laws empower fiduciaries to manage digital assets, they may
lack key powers with respect to cryptocurrencies.
Some State statutes generally enables individuals to appoint a fiduciary to manage their digital assets, which are broadly defined as electronic records. Under UFADAA, electronic records include account information for online exchanges.
Unfortunately, while UFADAA authorizes a fiduciary to access a deceased investor’s exchange account, it fails to consider that the private key — the essential information to remove digital assets from a digital wallet — is not available to exchanges. Moreover, UFADAA’s limited applicability to electronic records may exclude its applicability to hardware wallets.
4. Determine Tax Basis
The Internal Revenue Service has determined that digital assets are treated as property rather than currency for tax purposes. As such, it is necessary to report the capital gain and loss on digital asset transactions.
Many online digital asset exchanges provide excel sheets that track investors’ historical sales and
purchases of digital assets. These excel sheets typically provide sufficient information to determine
the tax basis of an investor’s digital assets.
For digital asset trades made on online exchanges that do not track investors’ histories, tax basis
can be determined by recording and saving the trade confirmation.
These confirmations typically include the amount of the certain digital asset that is purchased or
sold, and the value of that asset denominated in the asset that it was purchased with or sold for —
whether that be fiat currency such as U.S. dollars or a different digital asset.
Investors in cryptocurrencies are at risk of losing their assets at death unless they plan ahead.
Following the steps above and speaking to an estate planning attorney versed in cryptocurrencies
will help ensure that digital assets are effectively passed to heirs or beneficiaries.
We Can Help!
If you would like to create an estate plan, we are here to help. We have a team of experienced attorneys who have helped many clients create estate plans that protect the people they love and the legacy they have created. Call our office to schedule an appointment to learn about our process and receive answers to any questions you may have. 314-759-6400.
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KEVIN SHAUN VITALE
VITALE LAW, LLC
20 MEADOWS CIRCLE DRIVE SUITE 224 LAKE SAINT LOUIS, MO 63367
Telephone (314) 759-6400