Why It Is a Bad Idea to Try to Hide Your Crypto

Thanks to the pseudo-anonymity of cryptocurrency, some cryptocurrency holders think it is smart to play coy and lie about their holdings. Aside from the fact that no lawyer can ethically help you try to cheat the government out of taxes you owe, for a few reasons, this is not a good idea when it comes to estate planning.

The Internal Revenue Service (IRS) classifies crypto as property [1], which means it is subject to capital gains rules and a potential step-up in basis if received as an inheritance or trust distribution after its previous owner dies [2]. If you secretly pass your crypto to a loved one after you die and they later sell any of it, they will need to report the sale on their income tax return. On the return, they will need to list their cost basis for all of the crypto sold, and if they leave it blank (or do not report the transaction at all and the IRS later finds out), the IRS assumes their basis is $0, which means they will be on the hook for paying income tax on the entire sale price. If instead, they had documentation that you had 1 BTC that you purchased for $100 in 2013, that they then both inherited from you and sold for $65,000 in 2024, they would pay nothing in income tax due to the step-up in basis they received when you died. So, while you may think you are doing your heirs/beneficiaries a favor by secretly handing off your crypto holdings to them, you may actually be setting them up for a massive, unnecessary tax liability.

Keeping with the topic of taxes (everyone’s favorite), if you try to cheat the IRS on income taxes or your trustee/personal representative/executor tries to cheat on your estate taxes, the IRS will likely assess penalties in addition to the taxes owed. Even worse, the IRS can (and often does) seize cryptocurrencies to satisfy unpaid taxes, even if these have already passed to heirs/beneficiaries. No matter how careful you think you are being when trying to hide transactions from the IRS, one of your heirs/beneficiaries will undoubtedly eventually sell some of the crypto they received, at which point it is likely only a matter of time before the IRS discovers what happened and takes action to collect. 

With the explosion of interest in crypto investing over the past few years, coupled with the desire of many crypto investors to keep their transactions outside the view of the government, the IRS has recently ramped up monitoring and enforcement efforts in an attempt to make sure crypto transactions are appropriately taxed. I have personally had the IRS inquire into my transactions and those were very small potatoes compared to the multi-million dollar transactions of some crypto whales. Thankfully, I was able to immediately provide ample documentation, so the whole thing was a non-issue, but for the unwary (or sneaky), this could have been an expensive situation.

Finally, if your crypto holdings would have passed through probate or otherwise been available to settle creditor claims against your estate and there are unsatisfied creditor claims at the time probate is closed, those creditors could cry fraud. And if the beneficiaries were aware of and complicit in it, they could also be liable.

So, while it may be tempting to try to pull one over on the IRS, there is more lost than gained when it comes to crypto estate planning. If you need help setting up your estate plan, contact a crypto estate planning attorney.

[1] IRS Notice 2014-21; IRS Notice 2023-24

[2] I.R.C. § 1014