Crypto Inheritance Problem & Solutions | Best Crypto Tax Software & Portfolio Tracking

Introduction

The very purpose of cryptocurrency was to cut out the middle man. With the use of private keys, investors have the ability to control their assets completely, cutting out the middle man. Whilethe ability to cut out the middle man represents one of the biggest advantages of cryptocurrency, it also represents a new and often overlooked risk. What ifthe person holding the private key were to disappear?

Unlike other financial assets, a person’s crypto portfolio could be spread over multiple exchanges,wallets, and blockchain networks, often with little to no documentation. If the person were to die or become incapacitated, their assets could remain locked indefinitely. This problem, or the crypto Inheritance Problem, is becoming more and more important as digital assets become a larger part of modern financial planning.

The Growing Scale of Lost Crypto Assets

There is evidence to show that many people have lost their ability to gain access to their cryptocurrency. According to one set of researchers, there are many estimates suggesting thereare large amounts of bitcoin that are permanently lost because either theprivate keys were lost or the user forgot or erased the private key. Some times people would save their wallet file on an old computer or an external hard drive that they threw away or lost, or they may have written down their seedphrase but did not tell anyone in the family where it was.

Unlike with a bank or a brokerage account, you cannot go through a bank or brokerage to recover your cryptocurrency. The only way to confirm who has a right to successfully claimcryptocurrency is by ownership of the private key via the blockchain as verifiedby the blockchain. If you do not have a private key to your account, yourcryptocurrency will remain inaccessible.

Family members generally do not have access to the location or type of storage used by their loved one who invested into cryptocurrency. Typically, today's portfolios will include multiple types of hardware wallets, multiple types of centralized exchanges, multiple types of decentralized finance positions, and potentially, multiple types of NFTs on multiple blockchains; therefore, without documenting or tracking them it can bevery difficult to locate them.

Why Traditional Estate Planning Falls Short?

Traditional inheritance systems are designed and built on top of financial systems. Banks, investment houses, and property registers hold records of ownership, making it easier for executors tolocate and transfer assets after an individual’s death.

Cryptocurrency does not work like that. Ownership is based on private keys only, without any institutional records. Wallet addresses on the blockchain do not contain any identifying information, and there are no central registers that hold information onassets.

This makes estate planning difficult, as security concerns prevent sharing access credentials in advance, yet not doing so makes it impossible for heirs to access the assets. Additionally, crypto portfolios are often fragmented across multiple wallets andexchanges.

There may be some tokens that are kept in a cold storage environment, while some may be stored on the exchange or through decentralized applications. Since each platform operates independently, an executor could have trouble locating all the assets in the crypto portfolio; consequently, a new way to document and visualize assets is required for crypto inheritance.

When a Crypto Investor Disappears?

Imagine a common scenario. A crypto investor has spent several years building a diverse digital asset portfolio. Some of these assets are kept in a physical wallet for long-term holdings. Someare traded actively on an exchange, and others are used to generate income through a decentralized finance protocol.

The crypto investor knows how toaccess all of these assets and knows where they are located. However, their family knows only that they “own some crypto.”

When a crypto investor becomes incapacitated or dies unexpectedly, the family will be left in a state ofuncertainty immediately surrounding their estate. They will need to not only find out if any digital assets exist but also figure out where the assets arelocated (e.g., are they held on a hardware wallet, at an exchange, or via seed phrase, etc.).

With the discovery of some of these details, however, it is not uncommon for heirs to have difficulty understanding the actual structure of their father's crypto portfolio, and without good documentation, the whole portfolio will become very complex and very difficult to maintain.

The Challenge of Passing Down Assets

While a crypto wallet can provide access to assets, understanding what is inside may not be as straight forward.Crypto portfolios often contain complicated histories of crypto transactions,such as token swaps, staking rewards, liquidity pool deposits, as well astransfers between blockchains, so for someone not familiar with these transactions it can be challenging to interpret the information found within the wallet.

Heirs will need to first identifythe assets that exist, how they will be valued, and if there are any applicable crypto tax obligations. Assessing these values can be very hard to complete without reliable records of previous crypto transactions.

In order to recreate the complete financial history of a crypto portfolio you may need to perform the extensiveanalysis of the blockchain. If a portfolio contains years of activity, the complexity it takes to adequately recreate its financial history may take a significant amount of time and skill.

The complexity associated with acquiring access to a portfolio underscores the necessity of having a portfolio that can be understood as well.

The Role of Portfolio Tracking

As the complexity of the crypto environment continues to grow, the ability to maintain a clear and concise view of the assets becomes more important. This is where portfolio tracking entersthe scene, helping to create a structured record of the various wallets,exchanges, and blockchain activities, including detailed crypto transactions. This eliminates the need to rely on fragmented data from a variety of different platforms.

Heirs or estate planners with ageneral understanding of cryptocurrencies can benefit from having a consolidated record of transactions. If the records were to be organizedclearly, instead of being a collection of disconnected blockchain transactions, an heir or estate planner would be able to better explain the structure of theportfolio.

As a result, the recording of activities on the blockchain will provide a clearer bridge for financial reporting and activity within the portfolio as compared to traditional methodsof tracking, including better preparation for crypto tax reporting and financial documentation.

How Kryptos Helps Address the Crypto Inheritance Problem

Platforms like Kryptos allow investors to keep their assets at the forefront, which can be important for managing complex crypto portfolios. Kryptos brings together investors’ wallets, exchanges, and blockchain networks to provide users with a unified view of their assets.

Furthermore, Kryptos has the ability to track users’ transaction history across multiple blockchain networks, which can be represented in a structured financial statement instead of viewing raw blockchain data. Instead, investors can easily understand their assets with Kryptos.

Cost basis tracking and crypto tax reporting are critical aspects of crypto portfolio management. Because many crypto portfolios contain multiple years of trading, determining profits and preparing crypto tax documentation can be difficult. Kryptos provides a way to create easily readable, structured reports that detail transaction history and asset profitability.

For many investors and accountants searching for the best crypto tax software, Kryptos also functions as a reliable platform that simplifies compliance. It can also complement professional crypto tax services by organizing financial records and simplifying the preparation of accurate crypto tax reporting.

By simplifying complex blockchain data into readable forms, Kryptos makes it easy to maintain transparency and manageability over time, even if another person may have to evaluate the portfolio at some point in the future.

Conclusion

Cryptocurrencies have brought a new model for financial ownership that is based on a sense of independence. However, this independence comes with a new sense of responsibility for the investors.

The crypto Inheritance Problem shows that investors are not careful enough when it comes to managing their digital wealth for future generations. This highlights the importance of thinking not only about asset security but also about documentation, financial clarity, and long-term crypto tax considerations.

Investors can be able to keep their digital wealth transparent, accessible, and manageable with the help of tools such as Kryptos, which many consider among the best crypto tax software solutions available today and which can also support professional crypto tax services when needed.

About the author

Payam Masood

Head of Content and Social Media - Kryptos