Passing On Cryptocurrency and NFTs

Cryptocurrency held in your own wallet is the one asset with no customer service. No bank can reset a lost key, no court can order a blockchain to move coins, and anyone who obtains the recovery words can take everything in minutes. That makes crypto both the easiest asset to lose at death and the easiest to steal during the handover. This chapter covers the difference between coins on an exchange and coins you hold yourself, how recovery phrases really work, shared-control wallets and trusts, NFTs, and the tax rules your heirs will meet.

On an exchange or in your own wallet

The first question for every holding is who controls the keys, because it decides how your heirs get the coins.

On an exchange or a broker (custodial). The company holds the keys and you hold an account. After a death this works much like a brokerage account: the executor sends a death certificate and the court's letters of appointment, the company verifies them under its identity rules, and the balance moves to the estate or a beneficiary. It can be slow, and a foreign exchange may apply its own country's rules, but the coins are not lost just because nobody knows your password.

In your own wallet (self-custody). Nobody but the holder of the keys can move the coins. If your heirs cannot reconstruct your wallet, the coins are gone permanently, and no paperwork changes that.

Most holders have both. Your inventory (Chapter 1) should list every exchange account and every wallet separately, with the networks each one uses.

Recovery phrases, PINs and the hidden passphrase

A self-custody wallet, whether an app or a hardware device, is created from a recovery phrase, usually 12 or 24 words in a set order. Those words are the wallet. Typed into any compatible wallet software, they recreate it on a new device.

That leads to three facts heirs often get wrong:

• The hardware device is a convenience, not the asset. If the device is lost but the words survive, the coins can be recovered on a new device. If the words are lost, the device is the only way in, and only with its PIN. Many devices erase themselves after a set number of wrong PIN attempts, so guessing is not a plan.
• An optional passphrase creates a different wallet. Many wallets let you add an extra word or phrase on top of the recovery words. With it, the recovery words open a different, often empty, wallet. Heirs who restore the words without the passphrase may conclude there was nothing there. If you used one, your instructions must say so.
• The software matters. Write down which wallet app or device you used and which networks the coins are on, so a helper can restore the right accounts.

Storing the words is a balance between two risks. A single copy is a single point of failure; many copies are many chances for theft. Common approaches include engraving the words on a metal plate that survives fire, keeping them in a sealed envelope with your attorney, and storing the recovery words and the passphrase in two different places, with instructions that bring them together. Never photograph the words, keep them in cloud storage or email, or write them in a will, which becomes a public record.

Shared control: multi-signature wallets

A multi-signature wallet needs more than one key to move funds. The common arrangement for families is two of three: you hold one key, a family member holds another, and the third sits with a professional service or in a separate secure location. Any two keys can move the coins.

That removes both single points of failure at once. One lost key does not lose the money, and one stolen key cannot take it. The cost is complexity: your heirs must understand how to use the setup, the keys must be kept apart, and companies that provide one of the keys for inheritance charge for the service. For a large holding many people find that trade worthwhile; for a small one, clear instructions and a well-stored phrase may be enough.

Trusts and professional custody

A revocable living trust can own crypto, either through a custodial account titled in the trust's name or through wallets the trustee controls. When you die, your successor trustee takes over without waiting for probate, which matters for an asset whose price can move a long way during a slow court process. The trust document can also tell the trustee how to handle forks, airdrops and timing of sales. Drafting a trust is legal work, and the cost depends on your state and your attorney.

Some people go further and pay a professional trustee or a regulated custodian to hold the keys. That buys expertise and continuity, and it costs a yearly fee measured as a share of the holdings.

On $250,000 held for 20 years, at an assumed steady 5.0% a year (real crypto prices swing far more than any steady rate), the holding grows to $663,324 with no fee, while a 1.0% yearly fee leaves $547,781. The difference, $115,544, is the price of handing the risk to a professional. Weigh it against the chance that your family loses the coins outright without help. The investment fee calculator runs this comparison with your own figures.

NFTs: what you actually own

An NFT is a token recorded on a blockchain, held in a wallet like any other crypto. Passing it on means passing on the wallet, so everything above applies. Two extra points:

• Owning the token rarely means owning the copyright. The artwork's copyright usually stays with the creator, and what you hold is the token plus whatever licence the collection's terms grant. Your heirs inherit that, not the right to reproduce the art freely.
• Value is hard to pin down. Many NFTs trade rarely, so a fair market value at death may need an appraisal or a documented record of recent sales, especially if the estate is large enough to file an estate tax return.

The tax rules your heirs will meet

Crypto is property for federal tax. The IRS has treated virtual currency as property since Notice 2014-21, so the rules for inherited property apply.

Basis generally steps up at death. Inherited property generally takes a new cost basis equal to its fair market value on the date of death, so the gain you built up during your life is not taxed when your heirs sell. Your heirs should record the value on that date, with exchange statements and price records, because they will need it when they sell. Coins you give away while alive do not get this step-up; the recipient generally keeps your original basis.

Estate tax applies only to large estates. Crypto counts in your estate at its value on the date of death. For deaths in 2026 the federal estate tax applies only above $15,000,000 per person, though some states tax estates or inheritances at much lower amounts.

More is reported now. Brokers report sales of digital assets to the IRS on Form 1099-DA, starting with transactions in 2025. That helps heirs reconstruct records, and it means sales made by the estate are visible to the IRS.

Finally, a warning to pass on: grieving families of crypto holders are a favorite target of scams. Anyone who asks for the recovery words, including a "recovery service" or a supposed exchange employee, is attempting theft.