The content in this article is provided for general information purposes and is not tax, legal, investment or other professional advice. Readers should seek appropriate professional advice prior to making any decision.
You’ve done everything you can to make sure your loved ones know how to access your cryptocurrency when you die. But what about tax?
They say there are only two things certain in life: death and taxes. Well, when you die, taxation remains an issue and your loved ones have to tackle the tax consequences associated with your cryptocurrency. Exactly what this could entail depends on a number of factors.
The first thing to work out is who owns the cryptocurrency? You may own it personally, jointly with your spouse, or you may own the cryptocurrency indirectly through your company, trust or superannuation fund.
If you own cryptocurrency jointly with your spouse, then it is likely your spouse automatically becomes the sole owner of the cryptocurrency upon your death. There is no immediate tax payable. For tax purposes, your spouse inherits your ownership history, including cost and acquisition times. This means that when your spouse subsequently disposes of the cryptocurrency, a gain or loss is realized by your spouse, including what would have been your share of the gain/loss, and tax is payable at your spouse’s tax rate.
If you personally owned the cryptocurrency, then it passes to your beneficiaries in accordance with your Will. If you do not have a Will, then State law determines who inherits the cryptocurrency - this may produce undesirable outcomes and so we recommend you have a tax effective Will in place. For taxation purposes, whoever receives the cryptocurrency will assume your prior acquisition history. So, for example, if you bought 1 bitcoin for $1,000 in early 2017, then your beneficiaries take on this history and should they dispose of the 1 bitcoin for $11,000 in mid-2018, they make a gain of $10,000 for tax purposes and will likely pay tax on 50% of the gain at their tax rate.
If the cryptocurrency is owned indirectly through your company or trust, then control of the cryptocurrency will pass to whoever inherits these entities. For a company, this comes down to who obtains ownership of the shares (per your Will or State law); whereas control of a trust is typically determined by the rules of the trust. If these entities continue to own the cryptocurrency after you die, then there are no immediate tax implications. On eventual sale, there’ll be a gain or loss as there would have been had you been alive, with tax payable at the company tax rate; or for a trust, at the beneficiary’s tax rate. The outcome is probably going to be similar to what would have happened had you been alive.
What is very important to your loved ones, is that not only can they recover the cryptocurrency, but they also have complete acquisition and cost records, since this is what they will later need to calculate gains and losses for tax purposes. Also, when you’re gone, it is likely a final tax return needs to be lodged on your behalf. You won’t be able to explain your intentions with the cryptocurrency, which is an important part in determining the appropriate tax treatment. Accordingly, it is best to discuss these issues with your loved ones and cryptocurrency specialist accountant, as then taxation affairs after you pass can be handled in a tax effective manner.
Regarding cryptocurrency which you may own in a Self-Managed Superannuation Fund (“SMSF), this will be sold to pay your superannuation interest; known as a “death benefit payment”. The sale of the cryptocurrency will give rise to taxation implications in the fund. The death benefit payment will be paid to your specified beneficiaries if you have previously lodged a valid binding death benefit nomination. If you have not done this, then the trustee of the SMSF (usually your surviving spouse or children) has discretion to pay the death benefit to one or more of your dependents or into your deceased estate. For taxation reasons it may be beneficial for your superannuation interest to pass to specific beneficiaries as it may reduce tax payable. This is something which you need to discuss with your accountant to ensure you have an effective tax strategy in place.
We at Munro’s are passionate about reducing your taxation burden, and that of your loved ones, and we are available to review your affairs to assist with implementing Wills and structures that’ll be tax effective when you are alive and when you die.