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Op-ed: Here's a smart tax-planning strategy for bitcoin investors

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

Of course, when an asset experiences exponential growth, it can invite some problems by way of tax exposure. Bitcoin has been called a lot of things, but the IRS views it property and not currency and taxes it accordingly. That means that all profits will be subject to short-term or long-term capital gains taxes.

To the extent that you sell your bitcoins within a year of purchasing them, any gains would be taxed at your ordinary income tax rate. Should you hold on for one year or longer, you would likely be subject to a long-term capital gains rate of 15%, depending on your income.

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Some would venture to say 15% of a large number like $5 million is a steep price to pay for being right. How, then, can the owner of a low-cost basis investment liquidate their holdings, diversify a concentrated position, receive a tax deduction, enjoy lifetime income and pursue philanthropic endeavors at the same time?

The answer may come in the form of a charitable remainder trust.

A charitable remainder trust allows donors to gift an asset to a trust designated to benefit a qualified charity at the death of the donor. While the donor is still alive, they must receive income from the trust. Charities are exempt from taxes, so when they sell the low-cost basis investment, in this case bitcoin, they don’t have to pay capital gains taxes.

While the charity won’t receive the gift until the donor passes away, the donor gets an immediate tax deduction. The way the IRS sees it, the deduction will be the present value of what the investments in the trust will be worth when the donor passes away.

Here’s an example: A 50-year-old investor donates $5 million worth of bitcoin to a charitable remainder trust. They receive lifetime income of 5% a year, assuming a life expectancy of 81, and the present value of the remaining balance left to the charity at the death of the donor would be an estimated $1.3 million. That serves as the amount of the immediate tax deduction available to the donor.

The bitcoin investor would have an opportunity to turn a low-cost basis holding into an income-producing asset that mitigates tax exposure from other sources of income. They would be able to diversify other concentrated positions without as much concern for the taxable consequences.

Let’s also remember that any low-cost basis stock can take advantage of charitable remainder trust, so if you’ve owned a technology company for a decade and don’t know how to exit the position without paying an exorbitant amount in taxes, this might be the solution.

It’s worth noting that this strategy is generally accompanied with the purchase of life insurance to replace the gift in the event that the donor dies prematurely. The income from the charitable remainder trust would be available to pay the insurance premiums, with minimal impact to the donor’s cash-flow.

These are complicated strategies, and the trust can vary in the frequency of future donations as well as the ability to defer payments from the trust that allows the principal to grow. In the latter instance, the remaining amount left to the charity increases, as would the immediate tax deduction.

Investors considering this course of action would be advised to speak with a qualified estate-planning attorney and a qualified tax advisor to help them navigate the laborious details and IRS requirements. In the end, it may be an excellent opportunity for the early adopters of crypto currencies to keep more of their profits and determine how their social capital is spent.

— By Ivory Johnson, founder of Delancey Wealth Management

Source: Business - cnbc.com

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