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Bitcoin investors can avoid taxes when selling their Bitcoin with a Charitable Remainder Trust (CRT). On $2.5 million capital gain you could earn an additional $7.5 million after taxes over your lifetime by using a Charitable Remainder Trust to sell your bitcoin.
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 bitcoin and you’ve got a big gain coming, or if you are planning to take gains off the table from selling your bitcoin, Valur can help you reduce your taxes.
Tom, who is 35 and lives in New York City, caught the bitcoin 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 Bitcoin since then. All told, he has invested around $250,000 in the bitcoin 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.
If he just sells his Bitcoin without doing any tax planning, Tom will owe $700,000 of federal, state and city taxes. Tom 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.
Recapping Tom’s Numbers
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.
The first benefit Tom will receive from putting his bitcoin into a CRT is an immediate tax deduction. There’s some complicated IRS-mandated math here, but the end result is actually straightforward: Tom 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 Bitcoin taxed inside of a CRT?
So Tom starts about $120,000 ahead. The biggest benefit of bitcoin 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 $700,000 in taxes we calculated above, he’d get to keep that money and invest it.
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 structure of CRUTs, Tom will have access to a growing share of his money every year, starting as soon as he sells his bitcoin: 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 Tom 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 $1.9 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.)
What would all these mean for Tom’s bottom line? If he keeps his money in a regular taxable investment account, he will end up with about $5.7M after taxes. If instead he puts them into a CRUT today, he will end up with about $13.7M in his pocket. So even after donating a decent chunk to charity, Tom will still pocket an extra $7.5M just by putting his bitcoin into a trust before he sells it. Lastly, he’d also get to make a sizable donation to charity, to the tune of $5.5 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, Tom still pockets an extra $7.5 million by putting his bitcoin into a Charitable Remainder Trust right before he sells it.
There are another two key decisions to make when establishing a CRUT.
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.
We’ve built a platform that makes advanced tax planning – once reserved for ultra-high-net-worth individuals – accessible to everyone. With Valur, you can reduce your taxes by six figures or more, at less than half the cost of traditional providers.
From selecting the right strategy to handling setup, administration, and ongoing optimization, we take care of the hard work so you don’t have to. The results speak for themselves: our customers have generated over $3 billion in additional wealth through our platform.
Want to see what Valur can do for you or your clients? Explore our Learning Center, use our online calculators to estimate your potential savings or schedule a time to chat with us today!
