Tax Talk: Cryptocurrency

plan for when you're no longer around

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Investing in crypto-assets is increasingly popular. But your executors and administrators could be left with a major puzzle if you don’t think ahead, Phil Clayton explains why.

According to the FCA, more than two million people in the UK have invested in some type of cryptocurrency. In our profession, very few client conversations can completely avoid the topic of death. And there’s no doubt that all cryptocurrency investors should carefully consider the effect of holding these assets at their death and how they could affect their estate.

Identifying cryptocurrency holdings

Many people choose to invest through so-called ‘hosted wallets’ with a third-party service (such as Coinbase or Binance). This method means that when the owner passes away, the investment can usually be tracked back to them and accessed. Some of these services allow the owner to appoint the beneficiary or beneficiaries in the event of death.

On the other hand, some of the original investors purchased and hold their cryptocurrencies in ‘hot wallets’ (where a private ‘key’ is kept online to access), or in ‘cold wallets’ (where a private ‘key’ is kept as a paper record, stored on a USB stick or another computer). These investments can therefore be harder to track and identify.

Nightmare scenario

You will all have read the story of the man who, in 2013, threw away the computer hard drive which held his Bitcoin wallet details. Since then he has been battling with the council to allow him to search the landfill to find that hard drive – ­­­which is reportedly worth around £275 million. 

In this case, the man is alive, aware of the issue, and trying in vain to be reunited with his fortune. Now imagine if he had died shortly afterwards: would we have any knowledge of this misfortune? Or, even worse, if he had not thrown away the hard drive himself but died unexpectedly, only for his family to dispose of it during the clear out of his property – never knowing the extent of the loss?

Shocking losses

Cryptocurrency data firm Chainalysis estimates that around 20% of the 18.5 million Bitcoin in existence are ‘lost’ online, either through death or missing details to a wallet. It is therefore vital not to leave your personal representatives (PRs) in a similar position when you die.

All owners of digital assets must keep a secure record of all of their holdings, login details, wallet keys, and so on. It could be kept in ‘cold’ storage, such as a USB stick unconnected to the internet to avoid potential hacking, or even on paper in a safe place. This would enable the PRs to identify these assets in the event of death.

If PRs know that digital assets were held by the deceased, they can hire experts to access their computer or other devices to search for any wallets or accounts showing evidence of holdings –  although success is not guaranteed.

Claiming cryptocurrencies and assets

If the crypto-assets are held through a third-party broker, the process of claiming them should be  similar to other investment assets.  Most brokers will require evidence of both a death certificate and grant of probate before giving access to the deceased’s accounts and assets.

On the other hand, if they are held through a hot or cold wallet, a grant of probate might not be needed to access them. Once accessed, it may be in the interest of the PRs to move the assets into a new wallet or new account for increased security.

Then when the assets are available, it is the PRs’ responsibility to enact the deceased’s Will as they would with any other asset. In your Will you may wish to include specific instructions as to how the estate administers your digital assets, but it’s important not to include the access details for wallets in your Will, as this will become public record.

Inheritance tax implications

Firstly, note that HMRC has said that while an individual is resident in the UK, it will treat any cryptocurrencies or assets as in the UK for tax purposes. This can affect non-UK domiciled individuals who are resident in the UK and currently assume their cryptocurrencies held offshore may be outside the scope of UK inheritance tax (IHT). In these circumstances, we suggest requesting specific tax advice on personal UK IHT exposure.

Cryptocurrencies and assets will be treated the same as many other investment assets (such as shares) for IHT purposes. The value will be included in the individual’s estate and be liable to IHT as normal. The value included in the estate will be the market value at date of death in pounds, as with other assets in the estate.

Unstable values

With the market value of cryptocurrencies fluctuating significantly every day, it would not be a surprise for the probate value liable to IHT to differ substantially from the disposal proceeds, or from the amounts received by the beneficiaries on distribution.

Some assets, such as quoted shares, land and buildings, qualify for post-mortem relief (providing certain conditions are met) should the value fall from the taxable probate value. But so far this relief does not seem to apply to cryptocurrencies and assets. This means that if there is a fall in value from the date of death to the disposal of the assets, it may not be possible to reclaim the IHT.

HMRC may update the rules in the future as it regularly reviews its position on cryptocurrencies and assets.

Tax after death

PRs should be aware that the income and gains in respect of cryptocurrencies and assets will still be taxable within the estate as normal. There may be gains or losses in the estate should these be disposed of in the administration, so they may be liable for tax.

Please see our previous article for more information about the tax implications of holding and selling cryptocurrencies and assets.

When holding cryptocurrencies and assets it is important to take time to plan for when you die.

  • Will your family be aware of these assets? 
  • How will your family access these accounts? 
  • Have you identified your wishes in respect of these specific digital assets?
  • How will the value of these assets affect your overall estate?