Coinbase, the largest crypto currency exchange, has more than 68 million verified users. To put that into perspective, TD Ameritrade has 11 million accounts, Charles Schwab has 14.1 million accounts, and Fidelity has 83.4 million accounts.[1] Over the past few months, there has been both a wide-scale acceptance of cryptocurrency and lower barriers of entry in investing in the crypto market. Large financial institutions have begun accepting it and the popularity of Robinhood and other app based trading platforms have allowed more ease of access to the less sophisticated investors. It is not uncommon for our clients, young or old, to mention investing in bitcoin or other cryptocurrencies and it is an important asset to consider when doing estate planning or considering the tax treatment of these assets. Non-fungible tokens, or NFT’s, have also become an important estate planning issue as well. These have become more popular over the last year or so and are most commonly seen and used in digital art. On March 11, 2021, a collage of 5,000 individual pieces of art as an NFT sold for over $69 million. The NBA has set up a digital trading card platform, and an NFT on there recently sold for $210,000.

Tax Treatment

In IRS Notice 2014-21, the IRS took the position in Q1 that for federal tax purposes, “virtual currency is treated as property”.[2] The IRS went on to further state that a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value (FMV) of the virtual currency…as of the date the virtual currency was received.”[3] Furthermore, if a taxpayer mines the virtual currency, the FMV of the virtual currency “as of the date of receipt” is includable in gross income.[4]

It is important to track the price paid and amount received for cryptocurrencies and NFT’s when the assets are sold because the assets will accrue capital gains and losses which will serve as crucial information when determining what the tax liability is.

Estate Planning

If you are having estate planning documents prepared or if you have a substantial interest in NFT’s or cryptocurrencies, you may want to consider whether you want the trustee to have the ability to invest in NFT’s. Trustees in South Carolina are held to the “prudent investor standard” meaning trust assets must be managed “as a prudent investor would by considering the purposes, terms, distribution requirements, and other circumstances of the trust”.[5] Given the volatility of NFT’s, investing in them might not fit the prudent investor standard. As such, because the prudent investor rule “may be expanded, restricted, eliminated, or otherwise altered by the provisions of the trust” we encourage our clients to consider if they want the trustee to be able to invest in NFT’s.[6]

Another important consideration when considering NFT’s, cryptocurrencies, and other assets utilizing blockchain technology are the transferability and awareness of the asset. Given the presence of the blockchain, it is vital that you ensure the private key or other required access codes are somewhere your personal representative or trustee can find them. Without access to that information, an NFT or cryptocurrency can be lost forever. Access to these types of assets can be very different than other financial accounts. The technology used to develop these electronic assets was designed to be different and if no one knows your login information, you will lose those assets. Recently, a crypto expert lost the password to his digital wallet. As such, he lost approximately $280 million dollars.[7] Another investor threw away a hard drive with his password on it and lost approximately $300 million to a landfill in Wales.[8]

It is also a nuanced, but crucial issue, that NFT’s and cryptocurrencies are not “tangible personal property”. This means under S.C. Code Ann §62-2-512’s separate writing provision, these assets are not includable in the written memorandum accompanying a will or trust. Therefore, if you want these assets to pass to someone other than your residuary beneficiary, they need to be included in the text of your estate planning documents. Your loved ones must know these crypto-assets exist, where they need to go to find them, what to do with them, and how to access them.

[1] https://www.jdsupra.com/legalnews/tax-and-estate-planning-for-8599264/

[2] https://www.irs.gov/pub/irs-drop/n-14-21.pdf

[3] Id.

[4] Id.

[5] S.C. Code Ann. 62-7-933(C)

[6] S.C. Code Ann. 62-7-933(B)(2)

[7] https://www.fool.com/investing/2021/06/18/the-man-who-lost-265-million/

[8] Id.