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Tax Planning for Cryptocurrency

Updated: Oct 27, 2022

Cryptocurrency (e.g., Bitcoin, Litecoin, Cardano, Ethereum, Ripple (XRP), etc.) is increasing in popularity as a form of a financial investment. As that market rises and falls, investment decisions can result in substantial tax consequences -- for you and your heirs after you pass away. Find out what we know about cryptocurrency tax planning and what you can do to protect your family from unexpected Bitcoin inheritance tax.

Cryptocurrency Assets are Different Than Traditional Assets

Despite its name, cryptocurrency isn’t treated the same as your bank account, insurance benefits, or investment assets. Pennsylvania and federal law consider cryptocurrency personal property rather than currency (i.e. money or “flat” money in the crypto world). This affects the way it is treated -- and taxed -- after you die. General tax principles that apply to property transactions must be applied to exchanges of cryptocurrencies. As such, crypto investors must recognize gain or loss on the exchange of cryptocurrency for cash or for other property. Accordingly, gain or loss is recognized every time that cryptocurrency is sold or used to purchase goods or services. How the gain or loss is recognized depends largely on the type of transaction conducted and the length of time the position was held.

Planning for Cryptocurrency and Inheritance Tax

The capital gains consequences of cryptocurrency transactions require careful consideration in estate planning as well. If your heirs receive thousands of dollars in appreciated crypto assets, they could face substantial inheritance tax consequences. It is important to anticipate those tax consequences while planning your estate. This may include making cash available to pay the inheritance tax that is owed, or using alternative estate planning methods, including various forms of revocable or irrevocable trusts, to reduce the taxable events. Even then, you should require your trustee to work with an experienced estate administration attorney to ensure the virtual assets are properly maintained and distributed when the time comes.

Tax planning for cryptocurrency assets remains unpredictable, and not just because the value of Bitcoin, Litecoin, Cardano and Ripple (XRP), etc.) can change rapidly. To make the most of your assets today and leave the most value to your heirs tomorrow, be sure to work with estate planning attorneys familiar with cryptocurrency to accommodate your tax planning and asset protection needs.

Contact Fiffik Law Group to Learn More About Including Cryptocurrency in Your Estate Plan.

Adding cryptocurrency to your estate plan is a delicate and technical job and is best to be accomplished by an attorney well-versed in different types of cryptocurrencies and digital wallets as well as estate planning and asset protection. The experienced estate planning attorneys at Fiffik Law Group can assist you in incorporating your cryptocurrency into your existing Will or creating a new Will or Trust with the digital financial assets and physical assets you would like to pass on. Contact us today.


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