Can Cryptocurrencies Be Held in a Trust? 

Cryptocurrencies are quickly becoming a big deal, with many brands and CEOs touting the technology behind them, blockchain, as an alternative to centralized financial transactions. Anyone who digs deeper into cryptocurrencies will hear of investments in the metaverse, NFTs, DAOs, Web3, and wallets as new paradigms for doing business.

Cryptocurrencies also offer investment opportunities, whether traditional investors like the high-risk, high-reward volatility of cryptocurrencies or not.

Chances are high that one of your clients has an investment in cryptocurrencies somewhere, whether they directly participate in this economy or own stock in a company that does.

Can Cryptocurrencies Be Held in a Trust?

Yes, legally they can, in both the United States and Great Britain.

If someone owns virtual currency directly, like Bitcoin or Ethereum, a fiduciary, executor, or personal representative can distribute assets from cryptocurrencies just like any other assets.

Someone can inherit cryptocurrency for the purpose of buying or selling it, just like stock. The IRS has released guidance with regards to how virtual currency transactions are taxed when an investor buys or sells them.

How Should an RIA, a Trustee, or a Wealth Manager Handle Cryptocurrency?

As of March 2022, there are more than 10,000 active cryptocurrencies, and their value goes up or down based on how many use them at any given time. This is much like how a national currency goes up or down in value on the exchange market. The more a country uses another country’s currency, the more that other country’s currency is worth compared to the native currency.

There are four key issues regarding how a wealth manager handles a client’s virtual currency, no matter what the name of it is (and cryptocurrencies have many names).

Get the Authority to Disburse Cryptocurrencies in the Trust Language

Trustees have the authority to make prudent investments in things like land, stocks, bonds, savings accounts, precious metals, currency, and mutual funds. And the language of a trust gives that authority to the trustee.

However, cryptocurrencies are much more volatile than ordinary investments. In early November 2021, one Bitcoin was worth more than $67,500. Six months later, the value was $39,650, a drop of nearly $28,000.

A wealth manager should get it explicitly in writing that a trustee has the authority to trade or disburse funds from a cryptocurrency to obviate any doubt.

Select the Right Fiduciary

Some fiduciaries may have policies against serving as the trustee for cryptocurrencies as a direct asset. But they would be okay with overseeing Microsoft stock, even though Microsoft is a large investor in cryptocurrencies, because Microsoft does so much more than cryptocurrencies.

Fiduciaries would have issues with cryptocurrencies themselves because they only do one thing, and they are all virtual. There is no tangible product or service anyone can receive from cryptocurrency until they cash it in at an exchange.

Find a fiduciary who will willingly take on the risk of a cryptocurrency if a client already has those investments in their portfolio.

How Does Someone Inherit the Crypto?

Another issue you may run into is how someone inherits a cryptocurrency. Because it’s all virtual, you must treat it just like a frequent shopper club account. Someone must have the login information for the cryptocurrency account in order to manage it properly and find any exchanges to buy, sell, or trade cryptocurrency.

What Are the Tax Implications of Cashing in a Cryptocurrency?

Any time a cryptocurrency is converted to cash, it is treated similarly to a capital gain. The trustee must know the date of the purchase and sale of the cryptocurrency, and how much the transactions were worth. Therefore, maintaining records is crucial regarding cryptocurrencies in a trust.

Who Can Help Me Manage Wealth Gained From Cryptocurrency?

HWA International offers RIAs and trustees the right software for trust accounting. With three different platforms, we can give you the tools you need to properly manage the investments in your care, whether you are a sole trustee or a wealth management firm with 200 clients.

Contact us today to see a demo of our software and see how it can assist you with the level of wealth management you need.

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