Op-ed: Here is a smart tax planning strategy for Bitcoin investors

Sawitree Pamee / EyeEm | EyeEm | Getty Images

The recent rise of Bitcoin and other cryptocurrencies has enriched early investors with returns that are more like the lottery than your typical bread-and-butter investment. After all, an investment of $ 10,000 to $ 100 per bitcoin would currently be worth an estimated $ 5 million.

Of course, when an asset is growing exponentially, it can create tax-related issues. Bitcoin has been called a lot of things, but the IRS considers it property rather than currency and taxes it accordingly. This means that all profits are subject to short-term or long-term capital gains taxes.

To the extent that you sell your bitcoins within a year of purchase, all profits will be taxed at your normal income tax rate. If you hold out for a year or more, you would likely be subject to a long-term capital return rate of 15%, depending on your income.

More from the FA Playbook:
Can advisors meet the growing demand for financial advice?
Investors should be making some safe money movements now
This film can teach us how to prevent elderly financial abuse

Some would dare to say that 15% of a large number like $ 5 million is a high price to pay to be correct. Then how can the owner of a low-cost basic investment liquidate their holdings, diversify a concentrated position, receive a tax deduction, enjoy lifelong income while pursuing philanthropic endeavors?

The answer can come in the form of a charitable residual foundation.

A nonprofit residual trust enables donors to donate an asset to a trust that will benefit a qualified charity in the event of the donor’s death. While the donor is still alive, he must receive income from the trust. Charities are tax free. So when they sell the inexpensive basic investment, in this case Bitcoin, they don’t have to pay capital gains taxes.

While the charity receives the gift only after the donor dies, the donor receives an instant tax deduction. As the IRS sees it, the deduction is the present value of what the investments in the trust are worth if the donor dies.

Here is an example: A 50-year-old investor donates Bitcoin worth 5 million US dollars to a non-profit residual foundation. You will receive a lifetime income of 5% per year with a life expectancy of 81%, and the present value of the remaining balance that will remain with the charity upon the death of the donor would be estimated at $ 1.3 million. This is the amount of instant tax deduction available to the donor.

The Bitcoin investor would have the option of converting a low-cost base stake into an income-generating asset that mitigates the tax exposure from other sources of income. You could diversify other concentrated positions without worrying about the taxable consequences.

Also, remember that any low-cost base share can use the trust in charitable causes. So, if you’ve owned a tech company for a decade and don’t know how to get out of the position without paying an exorbitant amount of tax, then this may be the solution.

It’s worth noting that this strategy generally comes with getting life insurance to replace the gift in case the donor dies prematurely. The income from the charitable residual fund would be available to pay the insurance premiums, which has only a minimal impact on the donor’s cash flow.

These are complicated strategies, and trust can vary in the frequency of future donations, as well as in the ability to defer payments out of trust that allows the principal to grow. In the latter case, the remaining amount that remains with the charity increases, as does the instant tax deduction.

Investors considering this approach are advised to speak to a qualified estate planning attorney and tax advisor to get through the tedious details and IRS requirements. In the end, it could be an excellent opportunity for the early adopters of cryptocurrencies to keep more of their profits and determine how their social capital is spent.

– From Ivory Johnson, Founder of Delancey Wealth Management

Comments are closed.