Bitcoin Ownership Traps: What Happens When the Owner Dies

When someone dies, their Bitcoin can vanish if the keys to the wallet are lost, as there is no institution to step in and handle the transfer of ownership. This is the case for self-custodied Bitcoin, which is stored in a wallet that is controlled by the owner and not held by a brokerage account or regulated custodian. The executor of the estate will handle the necessary paperwork for Bitcoin held through a brokerage account, but self-custodied Bitcoin functions like cash hidden in a safe that only the owner can open.

A letter of instruction can clarify which wallets exist and where the seed phrases are stored, without exposing sensitive information. This can be kept in a safe-deposit box or a locked drawer, and the executor must know that the Bitcoin exists in the first place. The IRS considers Bitcoin to be property, and when property is inherited, it usually receives a 'stepped-up cost basis', which means the starting value resets to its fair market value on the date of the owner's death.

In 2020, blockchain data firm Chainalysis estimated that about 3.7 million BTC appear to be lost, valued at around $315 billion as of October 4, 2026. Creating a plan is essential, but it also requires regular updates. If a Bitcoin owner transfers coins to a new wallet, opens a brokerage account, or changes devices, they need to ensure the letter of instruction reflects the current information.