You have probably heard the terms “Bitcoin”, “Dogecoin” or maybe even “Ethereum” even if you do not own any of these assets yourself. All of these terms are names for cryptocurrency, which is a digital asset that is created and traded online on exchanges like Coinbase and Gemini. If you own cryptocurrency (“crypto”), you can only access these assets by public and private keys (like passwords) that may be dozens of characters long.
The IRS does not consider crypto to be currency but instead considers it investment property. The value of crypto is not a stable number but changes with the market. Bitcoin’s value, for example, increased by 70 percent in 2021, but has seen volatility in recent months. Since the IRS treats crypto as property, profits from the sale of crypto are subject to capital gains tax which may be long-term or short-term depending on how long the asset is held. A taxable event occurs when the crypto is exchanged for flat currency or a different brand of crypto.
In addition to the tax implications, crypto presents a unique challenge in estate planning. Since crypto can only be accessed by the key, it is important that this information is stored safely and included with your estate planning documents. No one will be able to access the crypto if they do not have the key. Some investors have lost millions by misplacing the key to their crypto investments. If the crypto holder dies without revealing the key to his or her heirs, the funds are lost forever. Estate planning documents should also include a provision that allows the executor or trustee to access, control and manage digital assets.
Another type of digital asset that is becoming more popular is a nonfungible token (“NFT”). NFT’s are unique assets, sort of like a work of art, that may be traded on marketplaces like OpenSea. Examples of NFT’s are: digital art, sports collectibles like animated NBA basketball cards, gaming collectibles, music, video clips, social media posts and digital real estate. Investors in NFT’s hope that these assets will grow in value just as rare postage stamps, coins or baseball cards traditionally have. An NFT of the first Tweet of Twitter’s founder, Jack Dorsey, for example, sold for over $2 million. If you own NFT’s, you need to consider the tax implications in your estate plan and be sure to leave the necessary keys or passwords so that your heirs can access these assets.
What to make of Cryptocurrencies?
Our view on cryptocurrencies and digital assets is that they are highly speculative, and we do not offer a way to purchase or hold them. We recommend following time-tested investment principles: purchase well researched leading companies with strong management teams, low debt, and in a sector expected to experience long-term secular growth. Do not let FOMO (fear of missing out) interfere with your investment decision making. Cryptocurrencies are not common stocks of companies, and do not trade on stock exchanges. There are no underlying fundamentals (such as an actual product being sold, which would create sales and profits) to support how a cryptocurrency is valued. Crypto prices may be manipulated by unknown, and perhaps criminal, market participants. Regulatory agencies have issued letters warning investors of these risks. For more information please see: https://www.investor.gov/ introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/digital-asset