Digital Assets and a Retirement Plan
Digital assets reach retirement portfolios in two ways: a small allocation bought deliberately, or a large position that grew unexpectedly and now represents real money. Both raise the same three questions — how it is taxed, how the records are kept, and what happens to it when the owner dies — and the answers are less familiar than for any other asset.
- Property, not currency:: Capital gain treatment applies, with the holding period deciding short or long term.
- Spending it is a disposal:: Using it to buy something realises gain on the difference between value and basis.
- The return asks directly:: There is a question on the return about digital asset transactions, answerable either way.
- Custody has no equivalent:: An asset held in a private wallet is unreachable without the keys, including by your executor.
Where the AI summary above gets this wrong
"You only owe tax on cryptocurrency when you cash out to dollars."
That's surface-true. Here's what it misses:
- Swapping and spending are disposals too — Exchanging one digital asset for another is a disposal of the first, taxable on the gain, even though no currency was involved. So is paying for something with it. Someone who never converted to dollars can still have a substantial reportable gain across a year of activity.
- Basis records are the practical problem — Reporting has improved but historical records frequently have not, particularly for assets moved between platforms or held in private wallets. Without basis, the whole proceeds figure can end up treated as gain, which is why reconstructing the history while it is still possible matters more than the tax rate does.
- Nobody else can reach a self-custodied asset — A holding in a private wallet is secured by keys that only the owner has. If those keys are not recorded somewhere an executor can find them, the asset is not difficult to inherit — it is impossible. That is a genuinely new problem, and it belongs in the household's documents rather than in a memory.
01 How it is taxed
For federal tax purposes a digital asset is property. Acquiring it is not a taxable event; disposing of it is, and gain or loss is the difference between the value received and your basis.
Disposal is broader than selling. Exchanging one asset for another, paying for goods or services, and certain transfers all count. The holding period decides whether the result is short-term, taxed at ordinary rates, or long-term on the capital gains schedule.
Receiving digital assets as payment for work, or from mining or staking, is generally ordinary income at the value when received, and that value becomes the basis for the eventual disposal. The return itself asks a direct question about digital asset transactions, which has to be answered whichever way is accurate.
Shows: the tax on a digital asset disposal, treating it as a capital gain at the rate you enter. Ignores: whether the holding period makes it short-term and taxable at ordinary rates, state tax, the net investment income tax, and transaction fees that adjust the figures.
Source: Digital assets
02 Records, and losses
Basis is the recurring difficulty. Assets bought years ago, moved between exchanges, or held in private wallets frequently have no reliable acquisition record, and without one the entire proceeds can be treated as gain.
The fix is unglamorous: assemble the history now, from exchange statements, bank records showing purchases, and wallet transaction records, and keep it with the tax papers. It becomes harder every year, and impossible if a platform closes.
Losses are treated as capital losses, offsetting gains and a limited amount of ordinary income, with the remainder carried forward under the usual loss rules. Given the volatility, harvesting losses deliberately is worth considering for anyone holding a meaningful position.
03 Custody, and what happens after
Assets held at a regulated platform can be reached by an executor through the ordinary process, with a death certificate and letters of authority. Assets in self-custody cannot be reached at all without the private keys or recovery phrase.
That is not a difficulty to be solved later. Without a record, the asset is permanently lost, and there is no institution to appeal to. A sealed record of how to access it, held with the will and updated when arrangements change, is the whole answer — and it has to be secure enough that recording it does not itself create a risk.
The other precaution is about the platform. Before moving money to any service, check its registration and reputation, because this sector attracts the same promises of return without risk that every other fraud does, and recovery after a platform failure is close to impossible.
Source: Protect your investments
I have no view worth publishing on whether these assets belong in a portfolio, and I have a strong one about the two practical failures I actually see. The first is basis: people who cannot show what they paid end up taxed on the whole proceeds. The second is access: a position nobody but the owner can reach is not an inheritance, it is a permanent loss. Fix both this month if either applies, and the investment question can wait.
FAQ
Is swapping one cryptocurrency for another taxable?
Yes. Exchanging one digital asset for another is a disposal of the first, taxable on the gain, even though no currency changed hands.
What if I do not know what I paid for it?
Without basis records the whole proceeds can end up treated as gain. Reconstruct the history from exchange statements, bank records and wallet transactions while it is still possible.
What happens to digital assets when I die?
Assets at a regulated platform can be claimed by an executor through the usual process. Assets in self-custody are unreachable without the keys, so a secure record kept with the will is essential.
Sources
Regulator references
- Digital assets · Internal Revenue Service · 2026What counts as a digital asset, the question on the return, and when a disposal is reportable.Last verified: 2026-09-07
- Topic 409: capital gains and losses · Internal Revenue Service · 2026The capital gain treatment that applies to a disposal.Last verified: 2026-09-07
- Protect your investments · U.S. Securities and Exchange Commission · 2026The verification steps that apply before investing through any platform.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
Run this rule against your situation
See what this rule does to your own projection — month by month, to age 90.
Join the Waitlist
Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.