Information in this article is current as of the date of publication. The policies, regulations, and laws within are subject to change with the IRS, state, or federal legislature.
There’s no denying it: It appears that cryptocurrency is here to stay.
Once confined to hidden corners of the internet, cryptocurrency transactions are now accessible to almost anyone through popular payment platforms like PayPal. Even top financial advisors are now counseling investors who can afford some additional risk in their portfolios to invest in crypto. Indeed, earlier this month, El Salvador became the first nation to recognize Bitcoin as legal tender.
Whether you are a seasoned cryptocurrency trader or a brand-new investor, you should be aware that cryptocurrency transactions have several implications for taxes and estate planning in Houston.
What to Know About Cryptocurrency and Taxes
First of all, it’s important to understand that the IRS treats digital currency like property. This means that, any disposal of cryptocurrency—whether it be exchanging it for a good, service, or some other form of currency—is a taxable event.
Although capital gains and losses certainly apply to crypto, fortunately, it appears at this time that the wash-sale rule does not apply to cryptocurrency transactions. The wash-sale rule hurts investors because it prohibits them from claiming a loss for the purposes of taxation when they sell an investment at a loss and then repurchase it within 30 days.
Despite cryptocurrency’s classification as property, it remains highly underreported to the IRS. Part of this is due to the recency of the laws around taxation. In other words, investors do not necessarily realize that their cryptocurrency is taxable. It is likely that, in the coming years, the IRS will implement a higher audit rate to crack down on compliance.
How to Estate Plan as a Cryptocurrency Holder
One consideration for estate planning is gifting cryptocurrency. Gifting crypto enables one to remove future appreciation from their estate. Given the volatility of digital currency, however, this strategy will not always pay off. Specifically, if a cryptocurrency gift were to decline in value, then the use of the gift tax exemption would go to waste.
Estate-planning attorneys who have followed developing cryptocurrency trends can help advise cryptocurrency holders on whether and when to gift.
Attorneys can also assist investors with managing the unique properties of cryptocurrency. Unlike assets in a bank account or family heirlooms stored in a home, cryptocurrency is not readily accessible. For this reason, it is easy to lose digital currency forever. An investor may simply forget the passcode needed to access their holdings, or she may die without having discussed her holdings with anyone. The right attorney can be trusted as counsel to assist in creating a wallet passcode or setting up other safeguarding techniques to avoid a potentially drastic loss of wealth.
Contact a Houston Trusts and Estates Lawyer Today
As the legal landscape of cryptocurrency continues to evolve, it is crucial to stay abreast of relevant laws and regulations to avoid an unfavorable tax audit or other negative outcomes. The Houston estate planning law firm of McCulloch & Miller, PLLC has developed expertise in cryptocurrency asset management by closely monitoring market trends and ongoing changes to the legal landscape. Our attorneys are prepared to assist Texas investors with a wide range of estate planning and taxation needs related to digital currency and other unique assets. For a consultation with an attorney, call 713-333-8900.