The typical cryptocurrency investor may prefer to spend their time perusing ‘yield farm’ returns rather than worrying about when they might ‘buy the farm’ themselves. However, it’s never been more important for them to consider putting a plan in place should they die, as their legacy could provide a significant tax headache for their families.
Some investors will be of an age where contemplating their mortality lies near the bottom of their list of concerns. However, it seems the demographics of crypto investors are broadening with the Financial Conduct Authority’s (FCA) latest statistics indicating that 70% of crypto users are over the age of 35. Further studies indicate that 10% of cryptocurrency owners in the UK are more than 55 years old.
Individual investors in these age brackets should be thinking of putting Wills in place, or updating them, so that there is a strategy to deal with their digital assets in the event of their death.
Forensic studies of the blockchain by the blockchain data platform Chainalysis have indicated that as much as 20% of all Bitcoin has effectively been lost, worth an eye-watering $185bn. That perhaps shouldn’t be a big surprise as cryptocurrency has its roots in the work of mathematician Alan Turing and cryptography. If someone dies without ensuring their private key is safely passed on, their cryptoasset investments could remain impenetrably stuck in a digital wallet and join the list of lost coins.
From a tax perspective, HMRC has confirmed that cryptoassets can be subject to inheritance tax at death, at a rate of up to 40% on their value immediately before the investor’s death.
Without a digital Will providing instructions, the executors of a crypto investor’s estate face the potentially bleak prospect of trying to establish how to gain access to the deceased’s digital wallets and their cryptocurrency exchange accounts.
It may prove an impossible task, with executors unable to access the cryptoassets at all. In these circumstances, the executors will need to demonstrate to HMRC that, for all intents and purposes, the cryptoassets are irrecoverable and therefore worthless.
It remains to be seen whether HMRC would accept such an argument without challenge. The cryptoassets still exist on the blockchain and could objectively still retain a value; it is just that they cannot be accessed. It’s likely that the burden of proof will lie with the executors to satisfy HMRC that the private key cannot be retrieved.
A further area of risk for the executors of a crypto investor’s estate is the volatility. This has been highlighted in recent weeks with Bitcoin touching record highs of $69,000 before dropping nearly 40% at one point to $42,000. It is quite possible that executors could eventually retrieve access to the deceased’s crypto portfolio, only to find that the value of the assets in the wallet has nose-dived.
Unlike investments in shares and land, there are no inheritance tax reliefs to take account of cryptocurrency dropping in value. Crypto traders should therefore invest in a digital Will if they wish to avoid their executors being stuck with a tax bill that wipes out the value of the estate.