Digital Assets: Does Your Plan Cover Your Cryptocurrency?

We are seeing more clients with cryptocurrency as part of their assets. You should not ignore these assets as part of your estate plan. Nor should you ignore cryptocurrency when filing your income tax returns.

For those of you who work with us, you know we have included authorizations for transacting digital asset business for many years. If you have not updated your plan recently, please check to assure it includes digital assets authorizations. If you want your cryptocurrency treated differently than you other assets at the time of your death, you must describe that in your plan.

The IRS wants to know; they may already know, about your cryptocurrency. Your 2021 Form 1040 will ask you if you received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency during 2021. You must check either “yes” or “no”. Please assure you answer this question and do not leave it blank. You should discuss your digital assets and virtual currency with your tax preparer to assure you answer the question accurately.

You should know, the IRS has announced its position that cryptocurrency is considered property just like any other property that you own. The gain and loss on transactions involving your cryptocurrency are considered capital gains and losses. You recognize the gain or loss whenever you exchange your cryptocurrency for dollars, goods, services, real estate, a different cryptocurrency, or other transaction. Failure to report gains and losses could subject you to interest, penalties, or worse. Discuss all of your cryptocurrency transactions with your tax advisor to make sure you are reporting your transactions accurately.