Many people early in their bitcoin journey end up temporarily distracted by altcoins. If this describes you, you may have accumulated an altcoin portfolio that you no longer want to hold long-term. You may want to dump those “cryptocurrencies” as fast as possible to accumulate more bitcoin, but you’re afraid of the large, up-front capital gains tax. A charitable remainder trust (CRUT) may be a solution to your problem.
What is a charitable remainder unitrust (CRUT)?
A CRUT is a tax-exempt irrevocable trust that makes annual payments to the trust beneficiaries for a certain period before donating the leftovers at the end of the period to a designated charity.
How CRUTs work with selling altcoins
To take advantage of a CRUT with altcoins, you contribute your altcoins to a trust before selling. The trust then sells the altcoins on a completely tax-free basis.
As trustee, you then reinvest the sale proceeds. Depending on the particulars of the trust and the legal opinion of your attorney with respect to the “jeopardizing investment rules” under the Internal Revenue Code, those proceeds may be eligible to be reinvested in bitcoin right away while still held in the trust, or may need to be first reinvested in more traditional stocks, bonds, and ETFs until distributed from the trust (at which point you can convert those funds to bitcoin).
The trust pays you each year for your lifetime from the reinvested proceeds (you can alternatively choose to have the payment made for the joint lives of you and your spouse, or a 20-year fixed period). This annual payment is set upon trust creation and is expressed as a percentage of the trust’s value at the beginning of each year.
When you (or you and your spouse) pass away, if anything is left in the trust, the balance passes to a charity of your choosing. You can change the charity at any time, so you are never locked in.
Overview of CRUT tax benefits
The tax benefits are huge:
- The sale of altcoin cryptocurrency is exempt from tax.
- The only tax paid is on the annual payment. So if you use a charitable remainder trust to sell $10M of cryptocurrency in 2022, and your annual payment for the rest of your life is $200,000 per year, then you only pay tax on $200,000 in 2022. Typically, with smart planning, this payment would be taxed at long-term capital gains tax rates.
- You receive a “bonus” income tax deduction for a charitable contribution in the first year. This amount of this deduction is a special calculation done by your attorney. The deduction can be used to eliminate tax on up to 30% of your income in the first year, and any unused amount carries forward for up to five future years. For example, if a 42-year-old man were to contribute $5M of cryptocurrency to a charitable remainder trust in 2018 and selected an annual payment equal to five percent of trust assets, he would receive a charitable deduction of roughly $1M. That deduction could be used against his taxable income in 2018 through 2022.
You are also allowed to name yourself as trustee of the trust if you like.
CRUTs for selling bitcoin
Some people have also deployed CRUTs when liquidating bitcoin holdings for dollars in a lump sum, but this is beyond the scope of this article, and we would never recommend selling bitcoin as a strategy! That said, always be sure to consult with a trusted financial advisor on these questions.
Getting started with a CRUT
The first step is to contact your estate planning or tax attorney in your state of residence to analyze tax benefits and draft the trust document. Unchained cannot draft a CRUT for you.
However, we can open an Unchained vault properly titled to your CRUT for any of its bitcoin investments, as well as an Unchained vault titled to you personally for the bitcoin you’ll be purchasing with your annual CRUT payment. Our trading desk is also available for reinvesting any dollar-denominated proceeds into bitcoin.
This article is provided for educational purposes only, and cannot be relied upon as tax or legal advice. Unchained makes no representations regarding the tax consequences of any structure described herein, and all such questions should be directed to an attorney or CPA of your choice.