NFTs have become a hot new trend for investors and early adopters in blockchain technology. Many investors are now wondering what an NFT is, how it works, and will it be a useful tool in passing their wealth to the next generation. But estate planning for NFTs is still in its infancy. Without an attorney who understands the technology to help you build a tech-savvy estate plan, your NFTs could be left to the wrong beneficiaries, or even become entirely inaccessible after you pass away.
That’s where NFTs benefit from blockchain technology. Each NFT is made up of a unique set of information, making it distinct from all copies. That information is issued using blockchain, produced on a smart contract platform, like Ethereum. Then, as the NFT changes hands, blockchain ledgers track the ownership interests, so investors always know if they are in possession of the original NFT.
Will NFT Investments Affect Your Family’s Capital Gains Taxes?
When investors put their resources behind new technologies like NFTs, it often raises questions about what the IRS will do with that investment. Will they be treated like investment accounts (similar to 401(k)s) or more like art, antiques, or other collectibles? NFTs are “self-created intangible assets.” They don’t exist outside the Internet. The creator has no “basis” in the thing sold, other than possibly the expenses paid in creating it. This might suggest that certain exemptions and rules that apply to collectibles won’t extend to NFTs, and their sale may be taxed as ordinary income, rather than capital gains. Unfortunately, the IRS has yet to issue guidance on the issue. Experts are left to speculate based on laws and regulations written long before NFTs were invented.
How Will the Florida Probate Court Treat Your NFT?
That distinction -- between income and capital gains -- may also affect how your NFTs will be treated as part of your estate. After you pass away, it will be up to your personal representative to determine the value of your estate, including both physical and digital assets. The value of your gross estate can affect probate costs, the division of property between your heirs, and, in the case of high net worth individuals, federal estate taxes.
If you die without a Will, or if your estate plan does not specifically include NFTs, cryptocurrency, or other digital assets, it will be up to the court to determine how those assets will be divided among your heirs. Like cryptocurrency, the password granting access to an NFT’s listing in the blockchain ledger is the literal and sometimes physical key to its ownership. Transferring possession of that password can be complicated, and may accidentally implicate federal cybersecurity laws if your personal representative does not have clear authority to use your password on behalf of your estate.
If your Will does not include specific gifts of your crypto art and other digital assets, the Florida probate court could treat the password key as representative of the asset itself. That could mean your NFT will be treated as intangible personal property -- the same as your Drive, OneDrive, or Dropbox account -- if you use online “hot storage” to maintain your key. If instead you have downloaded your key onto a “cold storage” device, like a USB device or external hard drive, your NFT could be treated no differently than the art hanging on your wall -- as tangible personal property.
In either case, the probate court will divide up everything in the category among the heirs or beneficiaries listed (such as “all my children”). NFTs often have a high value that cannot be easily divided, the way a cryptocurrency wallet may be. As a result, your personal representative may need to oversee the sale of your non-fungible token to make sure everyone receives their share of the value, meaning none of your heirs will receive the original asset.
Adjusting Your Estate Planning for NFTs
If you don’t like the uncertainty around crypto assets and estate planning, there are a few ways you can adjust your estate plan to accommodate NFTs and other crypto assets:
Document the purchase price of each NFT in cryptocurrency and its fair market value at the time of the purchase, to make it easier for your personal representative to calculate its value as part of your estate.
Most importantly, be certain to work with an estate planning attorney who understands and works with cryptocurrency, NFTs, and other digital assets on a regular basis. If you don’t, your Will or trust documents could be written in a way that leaves the issue up to interpretation by the Florida probate courts or the IRS. Depending on future developments in the law, that could be a costly mistake for you and your heirs.
At Harrison Estate Law, we understand the tax and estate planning issues surrounding NFTs and cryptocurrency. Our founder, McCabe Harrison, has an advanced degree (L.L.M.) in tax law, and years of experience preparing complicated estates. We ensure all our estate plans, including Wills and trusts, account for our clients’ digital assets, and anticipate the practical challenges and tax consequences that come with distribution. We are happy to meet with you to review your crypto assets and prepare an estate plan that shields them from unnecessary payments to the IRS. Please contact us online or via email or call 352-559-9828 to schedule a free consultation. If you don’t live close to Gainesville we are happy to set up a phone or Zoom call.