by Kylie Joubert
What is cryptocurrency?
Cryptocurrency (such as Bitcoin) is a virtual form of money that is often not held in traditional financial institutions. Instead, it is secured in a digital wallet and protected by cryptography making it difficult for unauthorised third parties to gain unauthorised access to the system.
While this attribute makes owning cryptocurrency the most secure way for you to accumulate and store wealth, it creates a potential risk that your digital fortune may be lost forever if you fail to make the appropriate arrangements regarding access to your digital wallet on your death and/or incapacity.
The very nature of cryptocurrency also makes ownership claims uncertain because parties to a transaction remain hidden. For example, a digital wallet can be registered without you providing a name or any other personal information to identify you and access to your digital wallet requires the use of a public and private key.
The public key is visible to everyone and acts as an address for sending and receiving cryptocurrency while the private key consists of a large string of numbers and letters that act as your password. While a private key can easily lead to identifying a public key, knowledge of the public key will not uncover the private key.
Access to your cryptocurrency on your death and/or incapacity
For cryptocurrency to be treated as any other asset on your death and/or incapacity, both the public and private key ought to be disclosed to your family members and/or your legal personal representative(s) (i.e., your executor(s)).
It is critical that you ask yourselves three (3) questions, namely:
- where and how to store your digital wallet backups and recovery access code (for personal access);
- what information to share, and when to share it, with your legal personal representative(s); and
- where and how to store your information for your legal personal representative(s) (as part of your estate plan).
Your estate plan regarding access to your cryptocurrency on your death and/or incapacity should include what, who and where. What are you using to access, store and manage your cryptocurrency, who can help your legal personal representative(s) in locating and retrieving your cryptocurrency when the need arises and where your access credentials are stored.
It is advisable to include your cryptocurrency in your digital estate inventory so that you are able to better manage these assets while you are alive and to help your legal personal representative(s) to locate and retrieve your cryptocurrency on your death and/or incapacity.
When deciding on the method for how the legal personal representative(s) will access your cryptocurrency, the most common options include:
- allowing one person to have access to your details (although noting that this person will have unlimited power to transfer or misappropriate your assets for their own purposes); or
- dividing up the access details, using one of the following four (4) common methods:
- multi-signature – requires multiple signatures to transfer the asset;
- back up + passphrase – where the passphrase acts as a cryptographically-enforced second factor that will be required to recreate the key material, and without it, no one will be able to unlock funds or transfer assets; or
- Shamir’s Secret Sharing – used to secure a ‘secret’ (i.e. private key) in a distributed way. The secret is split into multiple parts called shares and these shares are used to reconstruct the original secret.
It is important that you know the details of your digital wallet and exchange trading platforms because if your private key is lost or forgotten, the digital wallet cannot be recovered or restored. While some exchange platforms may have a password reset, this should not be relied upon.
Gifting of cryptocurrency in your will
When gifting cryptocurrency in your will, descriptions will need to be referenced to the relevant class of cryptocurrency and the location or identity of the relevant account or wallet so that it is sufficiently certain to your legal personal representative(s) and to avoid the issues of ademption.
Your legal personal representative(s) will need to access the relevant account and wallet and then distribute that particular cryptocurrency to a new wallet for each of the beneficiaries. This may be challenging when the nature of the cryptocurrency is constantly being transferred and converted into different forms of cryptocurrency.
Taxation considerations
The taxation of cryptocurrency is a developing area and guidance is being released by the Australian Taxation Office (“ATO”) on a regular basis.
The ATO has encouraged owners of cryptocurrency to keep clear and comprehensive records of all cryptocurrency transactions, which includes:
- the date of each transaction;
- value in Australian dollars;
- the purpose of the transaction;
- the details of the other party involved (if any);
- receipts of purchases or transfers;
- exchange records;
- invoices for any agent, accountant or legal costs;
- digital wallet records and keys; and
- any software costs associated with the management of tax affairs.
The ATO advise that records should be kept for a period of five (5) years from the later of when you prepare or obtain records, when transactions or acts are complete or the year that the capital gains tax (“CGT”) event happens. They must be in English (or translatable to English) and in writing (although they can be electronic or paper).
You may wish to consider using software such as Cointracker, CoinTracking, CryptoTaxCalculator or Koinly which allow you to keep track of all transactions in real-time by retrieving the transaction details from the blockchain, exchanges and wallets.
At the end of the financial year, the software will compile the transaction history into a single document that sets out the CGT and losses in the chosen currency, which allows a person to quickly and easily access their tax obligations while also monitoring the overall portfolio performance. It can also serve as valuable inventory for your cryptocurrency in your estate plan.
It is recommended that you seek taxation advice on your cryptocurrency as most cryptocurrency activities are taxable, either through CGT or income tax. The answer is determined by whether you are a cryptocurrency investor (i.e. buying and selling cryptocurrency with the intention of keeping it to make a profit) or carrying a cryptocurrency trading business (i.e. mining and selling cryptocurrency, or buying and selling cryptocurrency in an organised, business-like manner).
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