Your Will

What Is Bitcoin And How Does It Fit Into Estate Planning?

Bitcoin and your estate - what happens to the digital currency after death?

Bitcoin and your estate – what happens to the digital currency after death? 

What is Bitcoin?

Bitcoin, at its most basic, is a type of digital currency.

It is a form of investment, and used as a medium of exchange.

Therefore, many people consider Bitcoins and other forms of ‘crypto-currency’ to be an asset.

Bitcoins are created by super high-powered computers and have no real physical form. Bitcoin transactions are recorded and verified through a ledger known as the ‘blockchain’, which is an online computer file.

Maintaining the blockchain is called ‘mining’. Therefore, Bitcoins are ‘mined’ when payments are processed and recorded to the blockchain. This is usually done by individuals and specialised Bitcoin businesses. These individuals and businesses are rewarded or paid for mining by being given more Bitcoins.

Once the number of Bitcoins reaches 21 million, no more will be able to be mined.

Bitcoins are not controlled by a central bank and can be accessed by people worldwide.

Is it really a currency?

It depends who you ask, and where they are from.

The US, Finland, Denmark, Norway and Sweden all deem Bitcoin as property and not currency for tax purposes. Canada does not deem Bitcoin as legal tender but says anti-money laundering and similar regulations for it may need to be introduced.

The Australian Tax Office has also recently announced it will review the taxation of Bitcoin and other crypto-currencies. It has, however, confirmed that they should be subject to goods and services tax and income tax, and that records should be kept for potential capital gains taxes.

In China, Bitcoins are seen as a virtual commodity and not as a currency. It is illegal for Chinese banks to deal with Bitcoins. Singapore is said to have prepared tax advice stating that crypto-currency is neither a good nor a currency but will be assessed under the Goods and Services Tax. Singapore does however say that Bitcoin users may be subject to anti-money laundering regulations. Malaysia says virtual currencies are not legal tender.

Germany considers Bitcoin to be a unit of account or private money and subject to capital gains tax like any other form of payment for tax purposes.

The UK has decided to treat Bitcoin and other crypto-currencies similar to standard currencies.

Brazil has legislation that suggests the normalisation of crypto-currencies and provides that rules for businesses and transactions are to be set by the Brazilian Central Bank. Bitcoin holdings must be reported and capital gains taxes paid for Bitcoins over a particular value.

How does a person own Bitcoin?

Each person with Bitcoins has a particular address. A private key belongs to each address and is the means by which access to and thus ownership of the Bitcoins can be proved. Therefore, securing an individual’s private key is very important.

Bitcoins can be stored in what is often called a ‘wallet’.  Bitcoins themselves cannot be separated from the block chain ledger.  Therefore, the wallets only hold the information required to access the coins.

Wallets can be stored on an online exchange.  This means that the online exchange stores the private key to the Bitcoins (ie. ownership details).  The exchanges are where Bitcoins can be traded.

Bitcoin wallets can also be maintained by the individual.  This means that only the individual has the private key, which can be stored on their own devices.  These devices are usually not connected to the internet and so are less susceptible to hacking.

Another form of the wallet is in paper or physical form.  This is also known as ‘cold storage’.  In cold storage the Bitcoin owner would keep only a paper copy of the private (and possibly the public) key or keys to access the coins.

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How do Bitcoin transactions actually occur?

First of all, the source of the Bitcoins needs to be determined. The source is identified by one or more addresses.  The address is a reference to a destination in reference to the previous transaction to occur.  Addresses link transactions together in the blockchain or public ledger.

Transaction messages must be signed by the individual’s private key. The private key proves that the sender owns the Bitcoins that are being sent in a transaction.  When a transaction is signed it adds data to the transaction message, which is encrypted with the sender’s private key.

The signed message is then broadcast publicly to be verified.

Bitcoin transactions are permanent and transfer ownership to new addresses.  These addresses usually have random numbers and letters derived from public keys, but secured with the sender’s private key.

Transactions are broadcast to the Bitcoin network, which as discussed is created by individuals or businesses running Bitcoin software and connecting over the internet. Transactions are then confirmed via mining (creating a new block and updating the ledger).  Blocks are created by miners running algorithms multiple times in order to determine the block with the right properties so to allow it to be added to the ledger.

Transactions are only confirmed when they are included in the block chain.

How to find a wallet if the Bitcoin owner has died?

Searching for a Bitcoin wallet would usually require some expert computer knowledge.  The legal personal representative of the deceased’s estate should (or with the aid of a trusted computer expert) search computer files for the wallet or file.

The file may be titled ‘wallet.dat’ and held in a directory.  The file could also be titled with the words ‘bitcoin’ or ‘exchange’, or with some of various exchange names.

This may be linked to a Bitcoin program, which if launched may provide access to the data contained in the wallet.  Such wallet may or may not show the balance of Bitcoins held.  If there is no balance then it is possible that the Bitcoins may be held in an online wallet exchange or even a paper wallet.

It is also possible that the wallets could be protected by passwords, which are likely to be encrypted.  The deceased may have kept log in and passwords details on various computer text files such as on Word Pad or Microsoft office.

It is also possible that passwords or private keys maybe stored on USB sticks, on a deceased’s phone or other data drives.  Such information may also be printed or written on pieces of paper for cold storage.

If it can be determined that the deceased used a particular exchange or payment processer, then it also advisable to contact the exchange or processer and ask them for some assistance.  Such businesses may have policies regarding the death of account holders and may be able to provide information to you upon receipt of the deceased’s death certificate, your identification and other legal information.

Estate Planning for Bitcoins  

The simplest way is to share the entire Bitcoin wallet with the intended beneficiary.  However, the problem in doing so is that the beneficiary will also have access to your vital information before your death.  For this method, the individual must be able to trust his or her beneficiary completely.  That beneficiary will also need to keep the copy of the wallet secure.

Another way to include Bitcoins in your estate plan is to use ‘M-of-N transactions’.  M-of-N transactions require multiple signatures to send Bitcoin transactions (ie. multiple people need to ‘sign off’ for the transaction to occur).  This method requires ‘n’ number of people to sign the Bitcoin transaction but a smaller number, being ‘m’ who are required to validate it.

For estate planning this can be done with three people; the individual Bitcoin owner, his or her beneficiary and a third party.  The third party could be an estate planning lawyer, for example.  Upon the individual’s death, the legal personal representative (or beneficiary) could provide information to the third party to verify the individual’s death, for example, by providing the lawyer with the original death certificate.  The intended beneficiary and the third party could then sign off to finalise the transaction.

This method is safer than providing copies of a wallet to intended beneficiaries.

Another method of planning for Bitcoins after death is using what is called the ‘Dead Man’s Switch’.  This is very similar to the M- of – N transaction method, however, the third party is a computer server or program, often known as an ‘Oracle’.  Put simply, the computer server or Oracle would continually check whether or not the individual had died, for example by sending the individual emails and waiting for a lack of response or by checking death notice or death certificate databases.

If the individual did not respond after certain period of time to the Oracle’s email or if the Oracle found the individual’s death notice or death certificate on the database, then the Oracle would activates the switch and sign the transaction, thus transferring the Bitcoins to the intended beneficiary.

There are various online sites that operate as a Dead Man’s Switch.

Another option is to use ‘smart contracts’ or ‘lock time transactions’.  This method requires the individual to provide for a transaction to occur at a specific time in the future. The individual must then continue to reset the transaction date until a later date. When the individual has died, they will no longer be able to reset the transaction date, which will result in the Bitcoins being transferred.  In other words, smart contracts or lock time transactions are self-executing transactions that send Bitcoins upon certain conditions being met.

Another method is known as the ‘sharing scheme’, which again relies on trusting beneficiaries as does sharing the individual’s wallet.  The sharing scheme requires the Bitcoin owner to divide their wallet into several pieces so that in order for the key to be put together all of the individual pieces too must be brought together.  When all the pieces are brought back together then a Bitcoin transaction can be approved.

Pieces can be given to various members of the family or even hidden or stored in deed safes, for example. There are, however, obvious risks to this such as individuals losing their individual pieces or the pieces not being located.

Seek advice

This article provides a general overview of Bitcoin and potential considerations for estate planning considerations. Bitcoin owners should seek advice specific to their situation from a professional.


For advice about your Will or Estate issue, contact your nearest Tindall Gask Bentley office. You can also start your Will online here.