Here at Camuso CPA, we offer cryptocurrency tax planning and estate planning services in Charlotte to clients across the country. Cryptocurrencies are an exciting new currency medium that is fast gaining popularity. However, as a new monetary medium, there is a lot of grey area when it comes to taxes . The last thing any good investor wants is to be scrutinized by the IRS, and that is fast becoming a real possibility as cryptocurrencies become more mainstream. Here, we will go over charitable remainder trusts, a overlooked tax deferral methods for appreciated cryptocurrency.
Capital gains take a large portion of investors wealth, specifically when selling low cost basis short term assets. Charitable remainder trusts offer a way to sell immediately while still deferring this capital gains income over a much longer period, such as 20 years or even a lifetime. This method also provides benefit to charity, with a corresponding charitable deduction.
Charitable remainder trusts can be an effective tool for converting cryptocurrency into higher income producing assets. Charitable remainder trusts may accept cryptocurrency as an asset, and then pay the net income generated by the property to the trust beneficiaries or sell the property and then pay a fixed percentage of the value of the assets.
A charitable remainder trust is an irrevocable trust that provides for and maintains two sets of beneficiaries. First is the income beneficiary. The income beneficiary receives a set percentage of income from the trust for life or a term of up to 20 years. The second is the charitable beneficiary. This could be one or more charitable organizations that receive the principal of the trust after the income beneficiaries pass away.
A charitable remainder trust can sell a property, reinvest the proceeds into a diversified portfolio of securities, and pay a percent of the trust value, all without any capital gains tax liability for the donor. This is a very useful tool to strategically minimize cryptocurrency taxes.
- The sale or exchange of cryptocurrency is completely tax-free
- You only pay tax each year on the annual payment you receive from the trust. This payment would be taxed at favorable capital gains rates. Depending on the amount of your other annual income, this strategy will likely keep you in the lower capital gains brackets.
- In the year of trust creation, you receive an income tax deduction equal to the actuarial value of the charity’s projected gift.This actuarial value is a calculation done by your CPA. The smaller the payment you select, the larger the charitable deduction. Assuming you choose an appropriate charity, the deduction can be used to reduce up to 30 percent of your income in a given year, and any unusable amount carries forward for up to five future years.
There are many technical considerations when tax planning for charitable remainder trust and cryptocurrencies. Most important, the IRS requires that the actuarial value of the charity’s share must be at least 10 percent of the assets contributed to the trust. Be sure to consult with appropriate counsel to ensure you meet the 10 percent rule and other technical requirements.
If you are holding substantial cryptocurrency assets at a low cost basis and are looking for effective long term tax planning and estate planning strategies, Camuso CPA can help! Please feel free to give us a call for more information about cryptocurrency and other tax planning services. One of our friendly and knowledgeable representatives will be happy to answer any questions that you may have. We look forward to hearing from you.