Crypto Taxes for Inherited Assets in the US: Do They Exist?
Handling crypto taxes for inherited assets can be confusing. If you don’t have the right info, you could face problems transferring your crypto to your heirs. This might lead to legal issues and tax penalties, adding stress during an already tough time.
But don’t worry!
This article will guide you through everything you need to know, making it easier to manage your crypto and ensure your heirs get their inheritance smoothly.
How is Crypto Treated in the US?
In the US, the IRS treats cryptocurrency like property. This means the same tax rules that apply to stocks or real estate also apply to crypto. When you buy, sell, or trade crypto, you have to report these transactions on your tax return. Any gains are taxed as capital gains, and you can use losses to offset other income. More on this in the next section.
One big challenge with crypto, especially with inheritance and estate taxes, is the private key. The private key is a string of numbers and letters, similar to a PIN, that you use to access and transfer your crypto assets stored in your crypto wallet. So, anyone with the private key is effectively the owner of the asset held in the wallet, whether it actually belongs to them or not.
Unlike traditional assets, which you can transfer through legal documents, crypto requires you to either send your digital assets to your heir’s crypto wallet or share your own private keys with them to transfer ownership.
Crypto is included in the overall value subject to inheritance (assets passed down after someone’s death) and estate (the total value of a person’s assets at death) taxes. The IRS tracks these assets through exchanges and wallets that comply with regulatory standards.
Even though you don’t need traditional legal documents to transfer crypto, it’s not exempt from taxes. And not reporting these assets correctly can lead to troubles with the IRS.
The good news is that the IRS has high exemptions for inheritance and estate taxes, so most people won’t owe these taxes on their crypto anyway. But it’s still important to follow the rules to avoid any legal issues.
How is Crypto Taxed in the US?
In the US, cryptocurrency taxes mainly fall into two categories: capital gains taxes and income taxes.
Capital Gains Taxes: When you buy, sell, or trade cryptocurrencies, you need to pay capital gains tax. If you hold the crypto for less than a year, you’ll pay short-term capital gains tax, which can be anywhere from 10% to 37%. If you hold it for more than a year, the rate drops to between 0% and 20%. On the bright side, if you have any losses from your crypto investments, you can use those to lower your tax bill.
Income Taxes: If you earn crypto by getting paid for a job, providing a service, or through mining or staking, it’s considered income. Just like your regular paycheck, it’s taxed at your normal income tax rate.
For more detailed information, check out our guide on US crypto tax laws.
Crypto Inheritance Tax Vs Estate Tax
Inheritance and estate taxes often get mixed up, but they’re different in how they work. Both taxes are based on the value of a deceased person’s property, but here’s how they differ:
Estate Tax: This tax is taken from the total value of the deceased person’s estate before anything gets distributed to the heirs. The estate itself pays this tax. On a federal level, only estates worth more than $13.61 million in 2024 need to worry about this. Some states, 13 to be specific, have their own estate taxes. But the thresholds are way lower. More on this later.
Inheritance Tax: This tax is paid by the heir or the person who inherits the property. Only six states have an inheritance tax in the US: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rate and exemptions vary depending on the state and your relationship to the deceased. More on this later.
For crypto, the cost basis is usually the fair market value (FMV) at the time of the original owner’s death. To find this, you’ll need to check reputable cryptocurrency price indices for the value on that date. This FMV becomes your cost basis, which is important for calculating capital gains or losses when you sell the crypto in the future.
When you sell inherited crypto, the holding period starts from the original owner’s death. You’ll follow the same tax rules for capital gains we discussed in the last section.
Crypto Taxes for Inherited Assets
If you (or the person you’re heir to) live in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, the following is a quick look at crypto tax laws for inherited assets in these states. For the rest, you can skip this section.
Iowa: Inheritance tax rates range from 2% to 6%. Spouses, parents, grandparents, and children are exempt. The tax applies to amounts over $25,000, with charities exempt up to $500. Iowa plans to repeal this tax in 2025. For more info, read this.
Kentucky: Spouses, parents, children, and siblings are exempt. Others get exemptions up to $500 or $1,000. Tax rates range from 4% to 16%, based on the amount inherited. For more info, read this.
Maryland: Spouses, parents, grandparents, children, siblings, and charities are exempt. Others get up to $1,000 exempt, with a tax rate of 10%. For more info, read this.
Nebraska: Spouses and charities are fully exempt. Parents, grandparents, siblings, and children are exempt up to $100,000. Other relatives are exempt up to $40,000, and unrelated heirs up to $25,000. Tax rates are 1%, 11%, and 15%.
New Jersey: Spouses, children, parents, grandparents, and charitable organizations are exempt. Siblings and in-laws get up to $25,000 exempt. Tax rates range from 11% to 16%. For more info, read this.
Pennsylvania: Spouses and minor children are exempt. Adult children, grandparents, and parents get up to $3,500 exempt. Tax rates are 4.5%, 12%, or 15%, depending on the relationship. For more info, read this.
Crypto Estate Taxes
Estate taxes only apply in Connecticut, the District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, or Washington.
So, if you live in one of these areas, here’s what you need to know about crypto estate taxes. If you don’t, you can skip this part.
Connecticut: Estates over $13.61 million are taxed at 12% on the amount above the federal exclusion limit. For more info, read this.
District of Columbia: Estates over $4.7 million face a progressive tax rate from 11.2% to 16%, depending on the estate’s value. For more info, read this.
Hawaii: Estates over $5.49 million are taxed progressively from 10% to 20%. For more info, read this.
Illinois: Estates over $4 million face a progressive tax rate ranging from 0% to 16%. For more info, read this.
Maine: Estates over $6.8 million are taxed at rates between 8% and 12%. For more info, read this.
Massachusetts: Estates over $2 million face a progressive tax rate from 0% to 16%. For more info, read this.
Maryland: Maryland is the only state with both inheritance and estate taxes. Estates over $5 million are taxed progressively from 0% to 16%. For more info, read this.
New York: Estates over $6.94 million are taxed from 0% to 16%. However, New York has a “cliff” rule as well. So, if the estate exceeds 105% of the exemption ($7.287 million), the entire estate becomes taxable, not just the amount over the exemption.
For instance, suppose you have a crypto estate worth $7 million. New York’s estate tax exemption is $6.94 million. Since your estate exceeds this by $60,000, the entire estate gets taxed due to the “cliff” rule. This means the full $7 million is subject to tax rates between 0% and 16%, instead of just the excess amount. For more info, read this.
Oregon: Estates over $1 million are taxed progressively from 10% to 16%. For more info, read this.
Minnesota: Estates over $3 million face a tax rate from 13% to 16%. For more info, read this.
Rhode Island: Estates over $1.7 million are taxed from 0% to 16%. For more info, read this.
Vermont: Estates over $5 million are taxed at a flat rate of 16%. For more info, read this.
Washington: Estates over $2.193 million face progressive tax rates from 10% to 20%. For more info, read this.
FAQ
Can you use crypto to avoid inheritance tax?
No, you can’t use crypto to avoid inheritance tax legally. However, the IRS treats cryptocurrency as property, so it is subject to the same inheritance and estate tax rules as other assets.
Although tracking the ownership of crypto is more difficult than other asset classes, as we discussed before, the tax authorities can still find out. Trying to hide or not report crypto assets can lead to legal trouble.
Can cryptocurrency be inherited?
Yes, cryptocurrency can be inherited. When someone passes away, their crypto assets can be passed on to their heirs. The key is to make sure the heirs have access to the private keys or other necessary information to access the crypto. This is a part of inheritance planning. Without this, the crypto assets can’t be accessed or transferred.
Do I have to pay taxes if I was gifted crypto?
No, if you receive crypto as a gift, you generally do not have to pay taxes on the gift itself. However, if you later sell the gifted crypto, you must pay capital gains tax on any profit from the sale. The original cost basis of the crypto (its value when the giver acquired it) is used to determine the capital gain or loss.
However, there are a few exceptions to this. Check our in-depth crypto gift tax guide for more detailed information.