When you pass away, transferring your bitcoins onto a relative could leave them with a hefty tax bill. By law, Bitcoin is regarded as property and not currency.

Therefore, Bitcoin is eligible for capital gains tax as well as inheritance tax, which must be paid by the receiver. You could even end up paying as much as 40% of the value of the received Bitcoin as tax.

The new guidelines from the IRS and the thousands of letters the agency has sent to crypto investors goes to show that cryptocurrency taxes should not be taken lightly. While a lot of Bitcoin is lost when owners die, the little that does see new life is usually taxed if its value is above a certain threshold. This is known as the inheritance tax (or ‘death tax’).

So, what is inheritance tax exactly? Simply put, inheritance tax is the tax paid by an individual on money or property they have inherited. This should not be confused with estate tax, although in some countries, the tax is the same, and the term is used interchangeably. Inheritance tax could be a major problem for you if there is a chance you might be getting Bitcoin anytime soon, say, from a long lost relative.

In this article we look at an ongoing case that highlights the troubles of inheritance tax for Bitcoin investors.

The Kleiman Case

Let’s talk about the court battle between the Australian inventor and computer scientist, Craig Wright, and his late partner’s brother, Ira Kleiman. The court case is centered on the alleged theft of $10 billion by Wright from his late business partner, Dave Kleiman. With a judgment in Ira’s favor, Craig must pay half that sum or 500,000 in BTC. This sounds pretty straightforward a ruling, but there’s a catch: inheritance tax.

Ira is due to receive $5 billion AUD, and inheritance tax on crypto in Australia is a whopping 40%. The only way Ira can avoid having to sell a huge chunk of BTC to pay for this tax is if he has $2 billion just lying around – that’s ‘billion’ with a ‘B’. If he doesn’t have that much cash, he would have to sell a massive amount of BTC, which some have said could crash the market.

This whole situation shines a light on the problems Bitcoin investors may face if they have plans to pass their coins on to family members. You would need to know the law and how it applies to Bitcoin transferred upon your death. Different countries around the world use different taxation methods when it comes to inheritance. Depending on where you are located, you will need to familiarize yourself with the laws and how to navigate them.

How does inheritance tax apply to Bitcoin?

When you receive Bitcoin as an inheritance, you should declare the value as it was at the time you received it and pay any applicable taxes. Many people find that taxation of cryptocurrencies is pretty uncharted waters, and it is best to seek advice before you dive in. The inheritance laws in the US are quite different from the laws in Australia. Researching in-depth how these countries and corresponding agencies behave in regard to inheritance tax is a wise move.

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