Planning to leave a Bitcoin inheritance to your descendants and wondering about if there is any tax involved?
It seems that death and taxes and really the two certainties in life.
While those don’t sound like the most exciting topics, we are going to show you how to start planning your Bitcoin inheritance with all the tax details.
In this article:
What to consider about tax in your Bitcoin inheritance plan:
Bitcoin’s long-term potential, sustained by forward-looking crypto tax laws, creates a once in a lifetime opportunity for investors to create generational wealth.
Robberies, scams, and not having security processes in play for storing and transferring your crypto assets could lead you and your loved ones to lose your crypto investments.
When leaving Bitcoin to your descendants, automated processes should be put in place to manage assets and access codes securely across storage options.
In the U.S., your descendants may be liable for tax on your Bitcoin inheritance according to the IRS threshold for the total gross property you own.
The HMRC classifies crypto assets – including Bitcoin – as property for inheritance tax purposes in the U.K.
In Australia, you won’t have to pay inheritance tax when receiving new Bitcoin or other digital assets. However, as in other countries, if you later dispose of that Bitcoin, you’ll be liable for capital gains taxes.
After your descendants get the new crypto, you should implement proper processes and seek professional help.
Bitcoin as a path to generational wealth
Digital assets glimpse at a lifetime opportunity for a generation affected by uncertainty and worldwide threats while facing two of the biggest financial and health crises of the last 80 years (e.g., financial crisis in 2008, and Covid-19 pandemic in 2020).
Bitcoin’s long-term potential amid efficient tax laws
The rise of alternative assets such as Bitcoin after the financial crisis shows that opportunities can emerge amid turbulence. Its innovative technology, exponential price growth, and increased adoption from individuals to institutions led many to become Bitcoin millionaires.
Even if you’re not part of the Bitcoin 1% club, you can still benefit from the long-term potential of cryptocurrency.
We’ve seen that efficient crypto tax laws support investors’ long-term strategies generating consistent returns, mellowing out the volatility of a new space, and increasing the probability of creating generational wealth that will serve the ones around you in the future.
What if your hard work went to 0? How Inheritance enters the game
The key decision when leaving your crypto assets in inheritance is to evaluate the crypto expertise of your descendants and streamline all processes so they can benefit from your investment without succumbing to technical difficulties or security threats.
In the crypto space, there are many stories of inactive Bitcoin addresses holding life-changing amounts of cryptocurrency that are not accessible anymore. It is estimated that 4M Bitcoins are forever lost, while other studies point at 20% of the supply.
Be secure and have back-up plans ready
Security should be your priority when investing in digital assets. Not having backups, losing recovery seeds, robberies, and frauds involving private keys are among the primary causes of inaccessible assets.
No employee or family members had access to the exchange accounts, leaving millions of users to lose their holdings, the company to enter bankruptcy, and to face a myriad of lawsuits.
Luckily, these processes can be automatised or left to custodial services that manage your holdings and take care of the process of distributing your assets to descendants.
How does Bitcoin impact your inheritance tax?
After you decide on the most appropriate method to safeguard your investments and guarantee your descendants can benefit from sound investment planning, you cannot forget about the taxman.
Let’s explore how leaving Bitcoin and other cryptocurrencies to your close ones in an inheritance can impact taxes in the future.
Be aware of the U.K. inheritance tax for crypto
According to the U.K. crypto tax guide, Bitcoin and other digital assets are:
“property for the purposes of Inheritance Tax.”
Considering you followed our planning suggestions, you’ll have a will in place and an executor to undertake the process related to taxes or the use of an external custodial service.
Considering the inheritance tax guide from the HMRC, you may not be liable for inheritance tax if you fit in either of these two demographics:
“The value of your estate is below the £325,000 threshold,”
“you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.”
If you do not fall into these categories, you may be liable for the standard inheritance tax at 40% with exemptions in some specific situations.
If you need bespoke accounting advice, sign up to our Full Service, and we will link you to the best-qualified tax professionals in your area to help with these delicate issues.
High thresholds for inheritance tax in the United States
The American IRS guide accounts for your total “gross estate” in their fair market value at the time of death. This gross estate can consist of many assets, where crypto may be one of them:
“The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets.”
In the U.S., the tax will have a great impact on your Bitcoin inheritance if you’re a millionaire.
In 2020, the gross estate levels liable to inheritance tax are at $11.58M. However, this value accounts for all the property and not only digital assets. The key takeaway is to not forget about crypto on the assessment of your net worth.
Sharon Yip, one of our crypto tax experts, reinforces tax importance in these cases:
“Careful tax planning should be taken into consideration when deciding whether to gift crypto assets during lifetime or leave them in a will to descendants. The recipient of a gifted asset usually inherits the donor’s adjusted cost basis and holding period, while an automatic step up in basis to the amount of fair market value of the asset on the date of death of the decedent is allowed for inherited assets, and the holding period for all inherited assets is always long term, regardless of how long the decedent had owned the asset.“
No Inheritance tax in Australia for Bitcoin
In Australia, the TAO guide states that “there are no inheritance or estate taxes.” As a result, your Bitcoin inheritance is tax-free.
Inheritance tax in Germany for Bitcoin
In Germany, inheritance tax on assets can range from 7% to 50%, depending on many factors. Bitcoin and other cryptocurrencies are included in the total inheritance left to descendants.
Furthermore, the tax exempt thresholds differ for children and spouses, while there are other factors to define the final tax rate.
What your descendants should consider when receiving your Bitcoin?
After descendants receive crypto, they must have in place security aspects to keep your investments safe in the long-term.
Selling for a profit in the future? Watch out for capital gains taxes
Receiving cryptocurrency from a will is different from what you do with it after for tax purposes.
If you later dispose of your cryptocurrency with a profit, you are subject to capital gains taxes.
This is true across countries, giving even more reasons to have proper accounting management of your transactions to avoid tax concerns in the future.
Make your life easier and adopt a lean crypto tax operation
At CoinTracking, we often mention the importance of record-keeping amid the choice of exchanges you have to trade. If you’re leaving Bitcoin to your descendants with less crypto experience, you must have proper processes.
It’s crucial to keep appropriate records of transactions, tax filings, and payments while searching for the best tax-efficient strategies. Experienced CPA, Jason Tyra, highlights the easiness of CoinTracking to achieve complete accounting reports:
“The gain/loss calculation piece isn’t really that complicated. Where CoinTracking stands apart is the ease of use for my team.”
CoinTracking helps with:
25+ advanced reports
Automatic Gains calculations
Support for 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB) suited for a variety of countries.
Generating fully-compliant Tax Reports.
If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service. CT Full Service is provided by a team of crypto tax professionals led by Sharon Yip, an expert CPA. Follow our weekly AMAs on Twitter where Sharon Yip answers your crypto tax questions.
Follow our weekly content about crypto taxes:
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Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.