When you want to expand your portfolio, you do not want to overlook the vast new field of digital assets. It is rapidly growing, and new types of digital assets are added every day.
Although many people often think of cryptocurrency when they hear the words digital asset, there are many more types that you can invest in. Indeed, crypto is probably the most popular one—so far—but it is only one of many that can produce a profit for the owners.
Defining Digital Assets
A true digital asset exists only in a digital format. It must also include a right to use, which offers protection for the creator to publish and sell it and an opportunity for a buyer to purchase it. Even though no material assets are associated with it, they can rapidly grow in value and be exchanged for real currency, making them a potentially worthwhile investment.The Internal Revenue Service (IRS) says that digital assets also must be able to be stored on a secured digital ledger that is encrypted—usually as a blockchain entry. Because they have a value equal to real currency, some assets, such as cryptocurrency, can be used to purchase items where accepted.
Types of Digital Assets
The field of digital assets is a growing field that continues to expand. It occurs because of the dependence on and widespread use of computers and the creation and transfer of data in many forms.Just because something is in digital form does not make it a legal digital asset. It must also be registered. Things that may be considered digital assets, according to the Motley Fool, include the following (which is only a partial list):
- Cloud storage
- Cryptocurrency
- Digital media
- Directories
- Graphics
- PDF documents
- Presentations
- Website domains
- Word documents.
Tax Responsibilities
The IRS states that whenever you sell a digital asset, it is considered property, and taxes will likely be required—if used to buy goods, property, or services. Also, you may owe taxes when you get a receipt for a new digital asset from mining, staking, a hard fork, or an airdrop. If a digital asset is given as a gift, if it exceeds the donor’s gift exclusion for the year, you must report it on IRS Form 709.Estate Planning and Digital Assets
When making your estate plan, include all your digital assets—especially those with money in them or those with sellable value. If you do not, Fidelity says that it could bar your family members from accessing family pictures and videos, and they may be unable to gain access to digital assets that are earning money—such as cryptocurrency, eBooks, websites, content in cloud storage, cellphones, and anything else.It may mean that they cannot get access to funds you have earned from various sources, including cryptocurrency, non-fungible tokens (NFTs), miles or points on credit cards, gaming avatars, betting accounts, and more. Your beneficiaries need to know where to find passwords and other information to get access to or use the assets, transfer the information to their secure sites, or shut them down.
Legal documents can limit the type or amount of information given to beneficiaries. Some information may not be suitable for a particular beneficiary, but you can limit what is given to individuals in a will or other specialized document in your estate plan.
Create a List of All Assets
Before creating a document that assigns certain digital assets to various beneficiaries, make a list of them. If you are very active online, it will most likely take a while to think of them all unless you already have some kind of list. Once you have them all, approach an estate planning attorney and find out the best way to pass them on safely and securely.
Permission also needs to be given to the executor of your will. They will need access, SmartAsset says, through a document similar to the Revised Fiduciary Access to Digital Assets Act. Many states have these documents now. The document will give them access to your accounts and enable them to disperse them according to your estate plan. If desired, an estate planner can block the executor from accessing certain accounts.
Assets That You Cannot Give to Your Heirs
Although you can pass on many digital assets to your heirs after you die, there are some that you cannot. Nolo states that you do not own some assets, but you are allowed to use them.The accounts you cannot pass on include social media and email accounts. These terms were in the agreement you signed when you opened the account.
Precautions to Take When Buying Digital Assets
Because these assets are digital and you invest in them online, there is a strong potential for scams. Many people have lost a lot of money because they did not investigate the company more carefully.Some digital assets, such as virtual currencies, are highly volatile. However, they are capable of rapid growth. InnoTechToday advises that before you invest, understand your risk potential and diversify your investment money across various sectors to ensure that not everything is in one basket.
Finra warns investors that buying digital assets carries another risk. There is a lack of protection and oversight from regulatory agencies for this industry. It further adds to the risk—and there are plenty of scams.
Your estate plan must include all your digital assets if you intend to give them to your heirs. A trust and estate planning attorney can help create the documents needed with the updated wording. Keep in mind that these laws are still in a developmental stage, and you may need to update them often.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
