With cryptocurrencies such as Bitcoin becoming more popular for both professional and curious personal investors, it’s a matter of time before questions around what happens to someone’s cryptocurrency become larger issues for those in the world of estate law. Questions around how cryptocurrencies are defined by the government, how they are taxed, and what happens to them when their owners die are all valid questions with answers that are sometimes slow to appear, and susceptible to change as governments continue to try to keep up with the ways people obtain and use cryptocurrencies.
What is cryptocurrency?
Cryptocurrencies, including the most popular, Bitcoin, are virtual currencies that are issued independent of central authorities such as governments or financial institutions. Cryptocurrencies can be traded amongst people who are free to act anonymously. One of the most-discussed strengths of cryptocurrencies is their security, which is handled by a technology known as blockchain, which creates a sort of digital ledger, identifying and recording each transaction involving a currency.
Since cryptocurrencies are not issued by governments, they operate differently in other ways. Rather than being issued by an institution such as a mint, Bitcoin is issued to computers as a reward for performing complex tasks. As time passes, the difficulty in “mining’ bitcoin grows, and the demand for coins has (generally speaking) has also grown, leading to a rise in value.
How does the government treat cryptocurrency?
In Canada, cryptocurrency is not recognized as legal tender. That said, the CRA recognizes that it is used as a “medium of exchange for goods and services.”
That said, if a person receives payment for goods or services by way of cryptocurrency, the government states it is generally treated as business income or taxable gain, with losses being treated similarly. For more information, see the CRA’s guide found here.
What happens to my cryptocurrency when I die?
Generally speaking, cryptocurrency is treated like any other piece of property you own when you die, and it can be included in your will as part of your estate plan. However, there are important considerations unique to cryptocurrency that should be taken into account.
Most cryptocurrency is held in virtual wallets that people can access with a private key or password. Virtual wallets provide various options for passwords or keys. Some wallets allow users to set simple passwords, while others may require passcodes that are much more difficult to remember, such as a string of 20 words with no relation to one another. Some wallets are virtual, which means they are stored by a third party, while other wallets are physical and come in the form of a USB key.
The tricky aspect of cryptocurrency as it relates to inheritance is that the password is the only way for someone to access the funds in a wallet. There are a number of ways to ensure that your password is available. One method would be to write a password down in physical form and leave it in a safety deposit box. Another option would be to store it as a file on a USB key or other device. Whatever option you choose, it’s important to remember to strike a balance between accessibility for those who may need it once you’re gone, and security while you’re alive. Additionally, some wallet companies will permanently destroy cryptocurrency if a certain number of failed password attempts are made on a wallet.
Some parties offer solutions such as a “dead man’s switch” in which the wallet company will email a holder of cryptocurrency on a set schedule. If a certain amount of time goes by without a reply, the company will check the holder’s name against death records. If the person is found to have died, the company will then transfer the currency to whoever was supposed to inherit the funds.
Contact Derfel Estates Law today to speak with a Toronto estate lawyer who will work tirelessly to achieve the best possible resolution to your will, estate, power of attorney, or trusts dispute. Call us directly at 1-844-2-DERFEL or contact us online here.