What do you think of when you hear the words “digital assets?” Whatever it may be there’s a good chance it’s very different than what another person thinks of. Today’s post will help define and demystify digital assets, why they matter, and the risks and opportunities they embody.
If you had asked a friend ten years ago what they thought of digital assets there’s a good chance you would have been met with a blank stare or a friendly, “Come again?”. Outside of certain technology fields and niche online communities, the term “digital assets” wasn’t a part of people’s general vocabulary.
And for good reason! For centuries people’s assets were entirely tangible and visible – a car, a house, a safe deposit box. Only in the last several decades has American society shifted more and more of daily life to the digital realm. Even so, just because you got your first email address in 1997 didn’t mean your assets suddenly started converting from analog to digital!
However, technology has progressed immensely in just the past two decades and even if you don’t own any cryptocurrency or digital art, you likely have a few digital assets—whether you know it or not.
What are Digital Assets?
To make sure we’re all on the same page, we’ll use the following definition for digital assets:
“A digital asset is generally anything that is created and stored digitally, is identifiable and discoverable, and has or provides value.” 1
With that broad definition in mind here are several types of digital assets you may have:
- Social Media Profiles – do you use Facebook, Instagram, TikTok, LinkedIn or any other social media website? Do you use any of these sites for your business? These profiles, business or personal, fall under the realm of digital assets, even if you don’t ascribe monetary value to them.
- Word, PDF, and Excel Documents – do you have any documents saved on your computer (or in the cloud) that don’t have a printed copy anywhere? Congratulations! By our definition you’re the proud owner of a digital asset.
- Digital Media & Graphics – do you have any pictures, videos, music, blog posts, or other forms of media you’ve stored online or uploaded to a website or app? Do you create art or graphics online for personal or business reasons? Consider if you want a loved one to have “ownership” of these types of digital assets in the future.
- Loyalty Rewards & Points – Are you a frequent flyer on a major airline? Have you racked up those points from hotel or other loyalty programs? Those qualify as digital assets too!
There are many other examples of digital assets like these that most people don’t think of falling under the category. However, as the world becomes increasingly digitized, we believe it’s worth thinking about these assets even if they’re not something you would ever put on your net worth statement.
One reason for this is estate planning. If you get hit by the proverbial bus tomorrow, do you have your wishes clearly laid out for your executor to follow? Your spouse, child, or friend may not know all the digital footprints you’re leaving behind, so it is better to have this noted in your will ahead of time. And, if your estate plan was executed over 10 years ago, it’s likely it doesn’t address the existence of digital assets, which heir(s) receive them, or how to access them. If this sounds concerning to you, it may be a good time to revisit and update your plan. It’s also a good idea to have a conversation with family so they know exactly where things are and your intentions for them – just like for the classic car in the garage or the heirloom watch in your dresser.
The Shiny New Object: Virtual Currencies
The previous digital assets discussed are items that most Americans are likely to have. There is another class of these assets that fewer people have but have gotten much more media attention – cryptocurrencies and their derivatives.
We’ve previously written about Bitcoin but I’d also like to highlight some of the other most prominent examples of digital assets in this space:
- Cryptocurrencies – broadly defined as “Any digital store of value or medium of exchange (currency) that’s stored on the blockchain.” 2 Without going into unnecessary detail you can think of these as digital money. Bitcoin is the largest cryptocurrency by market capitalization ($500+ billion), followed by Ethereum ($200+ billion).
- Non-Fungible Tokens (NFTs) – these are tokens that represent ownership of a unique digital item. Think of an NFT as a digital certificate of ownership or authenticity – instant proof that a digital item is the original and belongs to you.
- Central Bank Digital Currencies (CBDC) – a digital representation of a nation’s fiat currency. Think of it as a “digital dollar.” The Federal Reserve Bank of New York has begun exploring the feasibility of a CBDC, and other nations like India, Brazil, and Japan are in pilot programs or plan to launch a national CBDC in the next few years.
Having these sorts of digital assets requires more planning for several reasons. First, regulatory uncertainty means it’s not yet clear exactly how these assets are treated for tax purposes during life and for estate purposes after death. While Johnson Bixby can’t advise on specific cryptocurrencies, NFTs, or other related digital assets, we do want to know when clients own them so we can ask important questions about how they’re addressing the tax and estate ramifications of ownership.
As you can see, unless you lead a digital-free life, it is highly likely that you own digital assets and should plan accordingly while you’re alive and for after you’re gone. If this post has inspired any questions about how to address digital assets in your own financial or estate planning, reach out to your financial planner.
To get started on an inventory of your digital assets, you might find this worksheet helpful. Better yet, consider using a password manager to safely store your passwords online.