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Reduce Your Cryptocurrency Taxes With A Charitable Remainder Trust

✅ A crypto investor who expects to realize a ~$2 million capital gain could stand to earn an additional $5.5 million over his lifetime if he puts his assets into a Charitable Remainder Trust before he sells them.

Carlos an Investor in Bitcoin and ETH wants to sell his tokens in a tax efficient way

Like a lot of our customers, Carlos, who lives in New York City, caught the crypto wave relatively early: He bought a few Bitcoin in 2016, when they were worth somewhere in the low four figures, and he’s committed to dollar cost averaging since then. He’s also dabbled in other crypto assets, and amassed a decent-sized stake in ETH. All told, he has invested around $250,000 in the crypto he currently holds, his holdings are now worth about $4.5 million, and, although it’s been a good ride, he’s looking to diversify, so he wants to sell half of his portfolio relatively soon.

If he just sells his crypto assets without doing any tax planning, Carlos will owe the federal government about $480,000 in taxes on his capital gains, and he’ll owe New York (city and state) another $270,000, for a total tax bill of around $750,000. Carlos would rather not send more than 35% of his gains to the government immediately — who would? — so he’s looking into a Charitable Remainder Trust.

What is a Charitable Remainder Trust?

Recall that a charitable remainder trust is a tax-exempt, irrevocable trust designed to reduce individuals’ taxable income. It distributes income to the trust beneficiaries at least annually for a specified period and, when that period is over, donates the remainder — everything that hasn’t been distributed yet — to your chosen charity.

A charitable remainder trust is the best of all worlds: It allows you to stash your assets in the trust, receive an up-front tax deduction, defer your taxes on any gains you realize inside the trust (for example, when you sell appreciated assets), put the trust’s income to use for yourself, and then donate a portion of the assets to charity at the end of the trust’s term.

Overview of how a Charitable Remainder Trust works

Recapping the Numbers

Cost basis on assets to be sold: $250,000

Current value: $2,250,000

Expected value at sale: $2,250,000

Immediate Charitable Deduction

The first benefit Carlos will receive from putting his crypto into a CRUT is an immediate tax deduction. There’s some complicated IRS-mandated math here, but the end result is actually straightforward: Carlos will get to deduct about 10% of the current value of the assets he puts into the trust. In this case, that’s a $225,000 deduction. Since he lives in a high-tax city in a high-tax state, the tax savings are substantial: That $225,000 deduction translates into cash savings of about $90,000 on this year’s taxes.

No Taxes On Sale

So Carlos starts about $90,000 ahead. The biggest benefit of a CRUT, though, is that he gets to defer all of the taxes—state and federal—he would otherwise have owed on his big sale. Instead of paying that $750,000 in taxes we calculated above, he’d get to keep that money and invest it.

This benefit is even more apparent if you’re a short-term investor and typically hold assets for less than 12 months before exchanging or selling. If that’s Carlos, then instead of paying $1.1 million in taxes (greater than 50%!), he will get to keep it all upon sale to reinvest in other assets (including more crypto).

Available Withdrawals

There’s one more significant question Carlos has to ask himself: How much liquidity does he need, and when?

One of the first questions we get in most conversations with our users is the following: “The returns are nice, but what if I need liquidity?” The answer is that CRUTs are more flexible than you think–in many ways, but especially in terms of liquidity options.

First, and most simply, due to the structure of CRUTs, Carlos will have access to a growing share of his money every year, starting as soon as he sells his crypto: Every year after he sells, he’ll be able to cash out a set percentage of the trust’s current value. (For a term trust, it’ll be around 11%; for a lifetime trust, it depends on his age, but it’ll be right around 6%.) If Carlos chooses a lifetime trust, and assuming that his trust’s assets grow at a historically average rate, he’ll be able to pull out about $2.24 million—strikingly close to the full starting value of his trust—after just 10 years. (And if he chooses a term trust, he’ll be able to pull out even more if he wants to.)

Aside from that simple liquidity calculation, moreover, Carlos has other tools at his disposal. One easy option is to open a simple line of credit: Although Carlos can’t borrow against the value of his CRUT, since part of that value belongs to his chosen charity, he can open a line of credit using the future income from his CRUT as collateral. What this means in practice is that Carlos can access as much as the full value of his expected payouts from the trust at a reasonable interest rate, should he need more than the liquidity he would normally be able to take out of his trust.

Total Returns

Comparing the returns of a Trust vs keeping the money in a regular, taxable investment account.

What would all of these tax savings and investment gains mean for Carlos’s bottom line? After, say, 40 years, if Carlos has his money in a Charitable Remainder Trust, he’ll end up with about $20 million in total payouts. He’d ultimately pay about $7.3 million of that in taxes, so he ends up with about $12.7 million in his pocket. Lastly, he’d also get to make a sizable donation to charity, to the tune of $3.8 million. This is the tradeoff of why the government is willing to let him grow his money tax-free.

If, instead, Carlos had kept his money in a regular, taxable investment account, he would have instead ended up with about $10.5 million before taxes or $7 million after taxes.

In other words, even after donating a decent chunk of change to charity, Carlos still pockets an extra $5.5 million by putting his crypto into a Charitable Remainder Trust right before he sells it.

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