Estate Bitcoin Assets Taxable End to “Like Kind Exchange”

 Beginning Tax Year 2017, the U.S. federal Internal Revenue Service (IRS) will now require some taxation of cryptocurrency that may affect estate planners and executors. As of this tax season, capital gains and losses on property transactions involving cryptocurrency, for example, must now be reported to the IRS (Notice 2014-21). Before the current tax year, the IRS offered exemption for “like kind exchanges” of crypto assets allowing swaps of digital currency for other assets. With IRS rule changes, and latest insights into the fluctuation of cryptocurrency value, make those assets a bit less attractive to investors than in recent years.


Capital Gains, Estate Tax, ICOs  

If market analysts have advocated cryptocurrency as an estate asset in the past several years, the rule reform will impact investors seeking tax-exemption from Bitcoin, Ethereum and Litecoin earnings. Once considered property rather than fiat currency by the IRS, the rules of have changed. The rules now also distinguish between the tax-exempt proceeds of equity funded trades, and cryptocurrency Initial coin offerings (ICOs), requiring that proceeds from the latter be treated as taxable income. In the short-term, it is likely that investors, including those responsible for estate trusts, will continue to invest in tax-exempt ICOs offered by off-shore banking institutions.   


Revocable Trust, Insecure Assets?

Estate planning of a trust holding cryptocurrency assets presents security issues. Probate is a public process. This makes the assets of a will and related estate documents availed to anyone as part of public record. The chance that an estate holder’s revocable trust will be compromised is potentially higher with cryptocurrency involved, as “living wills” are flexible entities intended to benefit the holder’s wealth earning prospectus while still alive. The fact that cryptocurrency assets are transferred via blockchain protocol also presents higher than normal risk as a cryptocurrency holder’s heirs may become a target for hackers knowledgeable about an estate.


Statutory Limits to Transfer

At present, statutory limits of executors or agents with power of attorney over an estate, restrict a representative’s authority to transfer the cryptocurrency assets of an estate to a beneficiary. Third party transfer of cryptocurrency by way of technological transfer or service at time of a decedent’s death must be expressly stated in a will or estate documents. Power of attorney authorization must allow named entities to act on behalf of the cryptocurrency holder to access the estate holder’s accounts and data to execute transfer or disposition of cryptocurrency assets. Preparation of cryptocurrency clauses in estate documents by the estate holder is the first step in reducing the risks of transfer.


Contact a Probate Attorney

With the new IRS rules requiring reporting of cryptocurrency purchases of property, the tax obligations of your revocable trust may have changed. Consult with a licensed attorney specializing in estate law. Ettinger Law Firm is a licensed attorney practice offering estate planning and probate litigation services. Contact Ettinger Law Firm for a consultation in a tax-related estate property matter.


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