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The Future Is Now: Digital Assets and Planning

Bitcoin. Blockchain. Meme coins. NFTs. FTX.


Over the past few years, digital assets have become a big part of our collective conversation. What was once a theory has morphed into an important part of our economy and every day financial lives. In fact, a December 2021 CNBC Millionaire Survey found that “most millennial millionaires have the bulk of their wealth in crypto.”


The worlds of financial and estate planning are not immune from the march of the digital. Worlds that were once primarily concerned with physical assets and investments must now accommodate the arrival and widespread adoption of digital assets.


In this post, we will provide a quick overview of digital assets, explain some of the challenges posed by them, and explore how to incorporate digital assets into your financial and estate plans.


More Than Just Bitcoin - What Are Digital Assets?

While it is easy to default to thinking that we are talking solely about cryptocurrency, such as Bitcoin, the world of digital assets is actually much broader. In fact, the Gartner Finance Glossary defines digital assets as, “anything that is stored digitally and is uniquely identifiable that organizations can use to realize value.”


While this piece will focus largely on the financially-related digital assets, it is important to remember that there are other assets that should be accounted for in any planning. These include:

  • Online accounts such as email, social media, websites, and bank accounts.

  • Intellectual property such as eBooks, digital music and software.

  • Data that is stored in the cloud, such as photo albums, videos and documents.

To ensure your estate, beneficiaries, and heirs will have access to these important assets, you should take the following steps:

  1. Create a detailed inventory of your digital assets that includes any login credentials or encryption keys.

  2. Create a digital asset will and appoint a digital executor to ensure your digital assets are handled properly, and per your instructions, after your passing (including the transfer of any such assets).

  3. Seek professional advice from lawyers, accountants and other professionals with experience with digital assets to ensure your plan is compliant with applicable laws and regulations.

  4. Update your plan as necessary.

A checklist of what to do if you have digital assets other than cryptocurrency or NFTs

The Heart of Any Planning - Taxes

The main driver of any planning effort is generally tax mitigation, and planning around digital assets is no different. When speaking of digital assets, the IRS definition includes, but is not limited to, convertible virtual currency and cryptocurrency, NFTs, and stablecoins. How transactions around those assets are taxed depends upon the asset and transaction type.


Income Taxes

If you are engaged in mining cryptocurrency, receive crypto as a promotion, or are paid in crypto for goods or services, you owe income tax on the entire amount of that crypto on the day you receive it. The tax rate is your then applicable marginal tax rate. If you hold the crypto that you received and that asset subsequently loses value, you are still taxed on the value as of when the crypto was received.


Take the case of NFL player Odell Beckham Jr. In November 2021, he announced he would convert his $750,000 contract into Bitcoin. The value of Bitcoin subsequently fell (by January 2022, it was estimated his salary was then valued at $401,500), but Beckham Jr. still owed state and federal income tax on the full $750,000 (at a combined rate of 50.3%). Between the fall in the value of the underlying asset and the tax hit, it is estimated that he only received $35,703 from the contract.


In addition, if you engage in the practice of “staking” cryptocurrency (essentially locking up your assets to secure the blockchain system in exchange for payment in that currency, like a high yield savings account), the proceeds earned from those activities will be considered regular income.


Capital Gains Taxes

From the perspective of the IRS, cryptocurrencies and “virtual currency” are capital assets, and therefore are subject to short and long-term capital gains when sold. This is the same as if you sold more traditional securities, such as stocks or mutual funds, for a profit.


To mitigate these taxes, you can engage in the same sort of planning as you do with other investments subject to capital gains taxation. These include holding the asset for a period sufficient to qualify for long-term, rather than higher short-term, capital gains rates, tax harvesting by offsetting gains with losses from other investments, and timing your sale to qualify for a lower rate based on your income.


While this tax framework looks very similar to the framework most are familiar with when investing in stocks, it is important to note that, as of now, cryptocurrencies are not considered “stocks” or “securities.” Therefore, they do not fall under the wash sale rules under IRC §1091.


With regards to NFTs, the IRS generally taxes these assets at the collectible rate, meaning they will be taxed at a maximum long-term capital gains rate of 28% if held for more than a year. One important note - if you use a cryptocurrency to purchase the NFT, you may be subject to capital gains tax on any profit related to the token that was used for the sale.


Gift and Estate Taxes

When it comes to gifting or inheriting cryptocurrency or other digital assets, the treatment is the same as any other asset. For gifts, if the value of the gift in any given year exceeds $17,000 (in 2023), it is taxable the way any other gift would be. The cost basis in the assets gifted remains the same as the giver’s cost basis.


In terms of inheritance, cryptocurrency is treated like any other capital asset passed on at death and therefore is taxed if the value exceeds the then applicable estate tax threshold. Much like other capital assets, these transfers result in a step-up in basis for the recipient to the then fair market value of the asset.


Enter The Swiss Army Knife of Planning: Life Insurance

Given the similar treatment for digital assets to more traditional assets, such as property and investments, planning around digital assets generally takes a similar form as well. And when we talk about planning, you know we are going to talk about life insurance.


So let’s look at how life insurance is relevant in planning for digital assets:

  1. Liquidity. Life insurance provides liquidity at your death to cover estate taxes, debts and living expenses. This liquidity ensures your heirs and beneficiaries do not have to liquidate assets, including digital assets, prematurely.

  2. Protection Against Loss. On a related note, the financial cushion provided by a life insurance policy allows your heirs to make smarter decisions around digital assets they may inherit.

  3. Estate Equalization. In the event that not all your heirs are receiving digital assets from your estate, life insurance proceeds can be used to balance out an inheritance.

Now, one area where there is a bit of debate in regards to life insurance and cryptocurrency is private placement life insurance (“PPLI”). We will not be going into a long discussion of PPLI in this piece, but at a high level, PPLI is used by wealthy individuals and family offices to obtain the tax benefits of life insurance for otherwise highly tax-inefficient asset classes. These benefits include tax-deferred growth, tax-free access to distributions, and the ability to convert the investments into an income tax-free death benefit.


In theory, PPLI would be a great solution for those looking to hold digital assets for a longer time-frame as part of a wealth transfer strategy. However, there are issues in practice. Currently, most (if not all) regulatory bodies governing PPLI carriers have expressed concern around digital assets due to anti-money laundering compliance concerns. This means that, as of now, it is not a realistic option. With certain global transparency initiatives being discussed by various regulators, this could change in the future.


We Are Living in a Digital World

Digital assets have arrived in the mainstream and their adoption raises questions around how to incorporate them into your planning process. The developing regulatory framework around these assets adds an additional element that must be considered.


Fortunately, generally digital assets are being treated like traditional capital assets, and therefore the planning techniques that have been used historically can be used in any digital planning.


At Robin Glen, we use our expertise in income and estate tax, private capital, and insurance analysis and design to create unique solutions that deliver impactful results for our clients and advisor partners.


If you or your client owns digital assets and is concerned how they fit into their overall planning efforts, contact us. We can help.



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