Leaving cryptocurrency to your loved ones isn’t as simple as many other kinds of assets – in fact, it can often be the most complicated financial aspect of estate planning.

This is because cryptocurrency has different tax considerations as well as a fluctuating value and continually changing regulations.

As such, if you own cryptocurrency, you must be aware of the correct process for passing it down to your loved ones.

What are the tax implications?

Firstly, your cryptocurrency holdings are part of your estate, meaning they could be subject to Inheritance Tax upon your death.

If the total value of your estate exceeds the nil-rate band threshold, currently set at £325,000 (£500,000 if it includes your primary residence), it may be liable for tax at 40 per cent on the amount above this limit.

Planning with the help of an accountant can help mitigate this tax burden, perhaps through gifting or placing other assets in trust.

Due to the fluctuating nature of cryptocurrency – as well as many other digital assets – if you are just under the Inheritance Tax threshold, you should still prepare to meet possible tax obligations if their value increases.

While Capital Gains Tax (CGT) doesn’t apply directly upon death, the beneficiaries of your cryptocurrency will inherit the assets at their market value at the time of death.

This valuation becomes their base cost for CGT purposes when they eventually dispose of the assets.

If the value of the cryptocurrency increases from the time they inherit it to when they sell or exchange it, they may owe CGT on the profit.

You should discuss this issue with them and educate them on the management of cryptocurrency so that they are fully prepared in the case of your death.

How to plan for passing down your cryptocurrency

Start by making an inventory of your cryptocurrency holdings, including wallets and any exchanges where you hold assets.

This inventory should be comprehensive yet secure, detailing the types of cryptocurrencies, their quantities, and how to access them.

Then you should ensure your Will clearly states your intentions for your digital assets.

You might appoint a digital executor, a person specifically tasked with managing your online assets, including cryptocurrency.

However, due to security risks, do not include private keys or passwords in your Will.

This is the biggest challenge in passing down cryptocurrency – ensuring your beneficiaries can access the assets when you are no longer around.

Use a secure method to share access instructions, which might involve a solicitor or a secure deposit box.

These instructions should detail how to access your digital wallets and any relevant exchanges, without compromising security before the time comes.

Seek professional advice

This is a must when it comes to estate planning with cryptocurrency in mind.

An experienced accountant can help you manage your tax obligations and organise your financial information so that your family only inherits your estate with no unexpected bills or surprises.

To speak to an accountant about leaving your cryptocurrency to your loved ones, please get in touch.