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A Charitable Remainder Trust to Avoid Crypto Taxes

Crypto investors can avoid taxes when selling their crypto with a Charitable Remainder Trust (CRT). On $2 million capital gain you could earn an additional $5.5 million over your lifetime by using a Charitable Remainder Trust to sell your crypto.

How to Avoid Taxes on Crypto With A Charitable Remainder Trust (CRT)?

A Charitable Remainder Trust is a tax-exempt account for appreciated assets you have not sold yet. Its key benefits are:

No matter your timing – if you’re still holding your crypto assets and you’ve got a big gain coming, or if you are planning to take gains off the table from selling an NFT — Valur can help you reduce your taxes.

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.

CRT Crypto Example

Allen, who is 35 and 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 been dollar cost averaging in BTC and Ether since then. All told, he has invested around $250,000 in the crypto he currently holds, his holdings are now worth about $2.5 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 $750,000 of federal, state and city taxes. 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.

You are allowed to put crypto (alongside other assets like real estate or stocks) inside of a CRT to take advantage of these benefits.

Recapping Allen’s Numbers

  • Cost basis on assets to be sold: $250,000
  • Current value: $2,500,000
  • Potential additional after tax gains from a CRT: $7,100,000

Charitable Remainder Trust Overview

As a quick overview, a charitable remainder trust is a tax-exempt, irrevocable trust (meaning it doesn’t pay taxes) 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.

charitable remainder trust
The flow of assets in a Charitable Remainder Trust

Benefits of Avoiding Taxes on Crypto with A Charitable Remainder Trust

1. Immediate Charitable Deduction

The first benefit Allen will receive from putting his crypto into a CRT is an immediate tax deduction. There’s some complicated IRS-mandated math here, but the end result is actually straightforward: Allen will get to deduct about 10% of the current value of the assets he puts into the trust. In this case, that’s a $250,000 deduction. Since he lives in a high-tax city in a high-tax state, the tax savings are substantial: That $250,000 deduction translates into cash savings of about $120,000 on this year’s taxes.

Is Cryptocurrency taxed inside of a CRT?

So Allen starts about $110,000 ahead. The biggest benefit of crypto trusts, 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.

2. Available Withdraw

In most conversations with our users they ask: “The returns are nice, but what if I need liquidity?” The answer is that Charitable Remainder Trusts are more flexible than you think–in many ways, but especially in terms of liquidity options.

First, and most simply, due to the strcture of CRUTs, Allen 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 for him it will 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 after just 10 years. (And if he chooses a term trust, he’ll be able to pull out even more if he wants to.)

3. Total Returns

CRT crypto numbers
CRT Crypto numbers

What would all these mean for Allen’s bottom line? If he keeps his money in a regular taxable investment account, he will end up with about $4.8M after taxes. If instead he puts them into a CRUT today, he will end up with about $11.9M in his pocket. So even after donating a decent chunk to charity, Allen will still pocket an extra $7.1M just by putting his crypto into a trust before he sells it. 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.

In other words, even after donating a decent chunk of change to charity, Allen still pockets an extra $7 million by putting his crypto into a Charitable Remainder Trust right before he sells it.

Crypto Trust: ‍Timeline and Distribution

There are another two key decisions to make when establishing a CRUT.

Length. This determines how distributions to beneficiaries will be made and can be either tied to people’s lives, for a period between 1 and 20 years or a combination.

Distributions. There are multiple distribution strategies, and your choice affects the consistency of your distributions and the return you get from the structure. If you’re interested in learning more about the 3 available structures and how they compare to each other.

Next Steps

Check out our next post for startup employees on deferring taxes on secondaries with a CRT. Use our CRUT calculator to evaluate the potential return on investment given your situation. And if you have any questions, schedule a meeting with us.

About Valur

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.