What Happens to Cryptocurrency When We Die?

Cryptocurrency, the revolutionary digital currency built on blockchain technology, has become an integral part of modern wealth portfolios. In the UK, the adoption of digital currencies and crypto assets such as Bitcoin and Ethereum has grown at a staggering rate over the past decade.

Unlike traditional money, cryptocurrencies do not rely on a central bank for their regulation or administration, highlighting their decentralised nature. As with any other asset, the question of what happens to cryptocurrency after we die has become increasingly significant. However, managing and transferring these digital assets presents unique challenges due to their decentralised and pseudonymous nature.

A digital wallet, a secure application or storage solution where cryptocurrencies are held, is crucial for managing these digital assets. Without knowledge of one’s digital wallet and its associated keys, inheritors or executors may face difficulties in accessing and managing these assets after the owner’s demise. Testing recovery seeds in digital wallets is essential to ensure they function correctly for future access by designated beneficiaries, emphasising the need for proper planning and security regarding digital assets stored in these wallets.

This article explores the key considerations for ensuring that your cryptocurrency is properly accounted for in your estate plan, the tax implications in the UK, and steps to ensure that these assets are preserved and accessible for your beneficiaries.

Understanding Cryptocurrency

Cryptocurrencies are digital currencies that rely on blockchain technology, a decentralised ledger that records all transactions across a network. Unlike traditional fiat currencies, cryptocurrencies are not regulated or issued by central banks. Instead, they operate independently, offering users the ability to transfer assets globally without the need for intermediaries like banks.

How Is Cryptocurrency Stored?

Cryptocurrency ownership relies on cryptographic keys stored in a virtual wallet. These wallets can vary in form and function, but they are categorised into the following:

• Hot Wallets: These are connected to the internet and are convenient for frequent transactions but are more vulnerable to hacking and theft.

• Cold Wallets: These are stored offline (e.g., on a USB drive or paper), making them far less susceptible to cyberattacks but requiring meticulous physical storage.

• Hosted Wallets: These are managed by third-party services, such as cryptocurrency exchanges. They provide a balance between convenience and security, but the owner must trust the third party to safeguard their keys.

Each virtual wallet is accessed using a private key—a unique cryptographic code that verifies ownership. If this key is lost, the cryptocurrency is irretrievable, emphasising the critical need for careful planning and secure storage.

Legal and Tax Considerations for Cryptocurrency in the UK

Legal Status of Cryptocurrency

In the UK, cryptocurrency is legally recognised as property rather than currency. This classification has several implications:

Cryptocurrencies, likened to tangible assets such as real estate, must undergo a probate process upon a person's death, noting the differences in handling physical property versus digital assets which may not be easily accessible.

1. Inheritance: Cryptocurrency can be included in an individual’s estate and passed on to beneficiaries.


2. Probate: Executors must identify, value, and manage cryptocurrency holdings as part of the probate process.


3. Accessibility: Without the necessary private keys or recovery phrases, cryptocurrencies are inaccessible, even though they legally exist.

Tax Implications

Cryptocurrency is subject to taxation in the UK, including Inheritance Tax (IHT) and potentially Capital Gains Tax (CGT).

Inheritance Tax (IHT)

Cryptocurrencies form part of the deceased’s estate for IHT purposes. The market value of the cryptocurrency at the time of death is used to calculate the tax liability. Executors must maintain accurate records and valuations to fulfil their responsibilities.

Capital Gains Tax (CGT)

If a beneficiary inherits cryptocurrency and later sells it at a profit, CGT may apply. When beneficiaries inherit Bitcoin, they do not incur CGT upon inheritance but may be liable for it if they sell the Bitcoin later. This can lead to dual taxation on the same asset—first as part of the estate for IHT and then as a gain for the beneficiary. Proper planning can help minimise these tax burdens.

Challenges in Estate Planning for Cryptocurrency

The Risk of Lost Assets

One of the most significant risks with cryptocurrency is the potential for loss. If private keys are not securely stored and accessible to beneficiaries, they will not be able to gain access to the assets, and the assets cannot be recovered. Studies have shown that billions of pounds worth of cryptocurrency have been permanently lost due to forgotten or misplaced keys.

Security Concerns

While the decentralised nature of cryptocurrency offers security from centralised failures, it also increases the complexity of estate planning. A public key serves as an identifiable address for digital wallets, enabling the sending and receiving of cryptocurrency. Executors must ensure that sensitive information, such as public and private keys, is protected from unauthorised access while remaining accessible to those who need it.

Legal Compliance

Accessing the digital assets of a deceased person without explicit authority can breach the Computer Misuse Act 1990 in the UK. This highlights the importance of proper estate planning and legal documentation to avoid potential legal issues.

Incorporating Cryptocurrency into Your Estate Plan

Documenting Your Assets

To ensure that your owned cryptocurrency is passed on to your beneficiaries, it is essential to document all relevant information:

• Private Keys: Securely store private keys, recovery phrases, and wallet addresses.

• Access Instructions: Create a clear guide on how to access and transfer the cryptocurrency.

• Wallet Details: Maintain an up-to-date list of wallets, their contents, and their purpose.

Secure Storage of Information

Avoid including private keys or sensitive information directly in your will, as wills become public records after probate. Instead, reference a separate, securely stored document that contains this information. Just as one cannot determine if someone has a bank account unless disclosed, the same applies to cryptocurrency ownership, signifying the importance of secure storage and privacy.

Options for secure storage include:

• Encrypted digital vaults.

• Physical safety deposit boxes.

• Trustworthy estate management services specialising in digital assets.

Choosing Executors

When appointing executors, ensure that they are familiar with cryptocurrencies or are willing to consult professionals with expertise in digital assets, especially if the deceased owns cryptocurrency. Lack of understanding could lead to mismanagement or even loss of the assets.

Using Trusts for Management

Establishing a trust can be a practical solution, particularly in the following scenarios:

• The intended beneficiaries are minors.

• The cryptocurrency holdings require professional management.

• You want to ensure long-term protection and oversight of the assets.

Additionally, appointing a Lasting Power of Attorney for property and financial affairs can be crucial in managing cryptocurrency assets if an individual loses their mental capacity. This ensures that an attorney can make informed decisions regarding financial matters related to cryptoassets.

Practical Steps to Prevent Loss

Inform Trusted Individuals

Ensure that trusted family members, friends, or legal advisors are aware of your cryptocurrency holdings. They should also know where the access information is stored and how to retrieve it.

Periodically Update Your Plan

The value of cryptocurrency can be highly volatile, and your holdings may change over time. Regularly review and update your estate plan to reflect the current state of your portfolio.

Test Recovery Methods

Periodically test recovery methods for your digital wallets to ensure that the access instructions, recovery seeds, and private keys are accurate and functional for future access by designated beneficiaries.

Implement Redundancy

Consider multiple layers of security to prevent the loss of assets due to a single point of failure. For example, maintain backup copies of private keys in separate, secure locations.

Leveraging Professional Advice

Given the complexities of cryptocurrency, consulting professionals can be invaluable:

• Estate Planning Solicitors: Specialists in digital assets can guide you through the legal and procedural aspects of including cryptocurrency in your estate.

• Financial Advisors: Cryptocurrency-savvy advisors can help with portfolio management and tax efficiency.

• Technology Consultants: Experts in digital security can assist in implementing robust measures to protect access information.

The Future of Cryptocurrency in Estate Planning

As the use of cryptocurrency continues to expand, its integration into estate planning will likely become more sophisticated. Innovations in digital asset management tools and services are emerging, offering individuals greater confidence in securing their cryptocurrency for future generations.

Blockchain Solutions

The technology called blockchain itself may play a role in simplifying estate planning. Smart contracts—self-executing contracts with the terms of the agreement directly written into code—could enable automated transfer of cryptocurrency to designated beneficiaries upon verification of the owner’s death.

Regulatory Developments

The UK government and regulatory bodies are increasingly acknowledging the importance of cryptocurrency in financial planning. Future regulations may provide clearer guidance on managing digital assets after death, reducing uncertainty for executors and beneficiaries.

Conclusion

Cryptocurrency represents a unique and valuable asset class that requires careful consideration in estate planning. Its decentralised, secure nature offers both opportunities and challenges for individuals in the UK.

By documenting access information, selecting knowledgeable executors, and addressing legal and tax implications, you can ensure that your cryptocurrency holdings are preserved and transferred according to your wishes. Engaging professionals with expertise in digital assets can further streamline this process, providing peace of mind for both you and your beneficiaries.

With proactive planning, you can safeguard your cryptocurrency for future generations while navigating the complexities of UK inheritance laws and regulations.