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 allowances for Inheritance Tax then it may be liable for tax at 40 per cent on the amount above this limit. The £325,000 nil rate band and the £175,000 residence nil rate band (usually applicable when your main residence is being left to descendents) mean that a couple can typically pass up to £1 million free from inheritance tax.

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 the value of your estate is close to the level of your  Inheritance Tax allowances, then you should still prepare to meet possible tax obligations if their value increases. It may also be worth considering seeking professional advice regarding selling some of these assets in order to provide increased certainty over the value of the assets that will be passed to the beneficiaries of your estate.

If the value of the cryptocurrency increases from the time that the beneficiaries of your estate inherit it to when they sell or exchange it, they may owe Capital Gains Tax (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.