If you are a cryptocurrency investor, that makes you a very brave person with a high tolerance for risk. Perhaps the riskiest form of investment, cryptocurrencies are well known for dropping 15% or more in value overnight. On the other hand, they can make you a millionaire just as quickly.
The Bitcoin Example
Take Bitcoin, for example, the most traded crypto. It doubled its value in 2021, only to lose most of that in the “great crypto crash” of January, 2022. Historically, Bitcoin started at $0 in 2009, and didn’t break $1 until April, 2011. It went on to break $1,000 by November, 2013, but then dropped back to $530 the next month. Its price didn’t top $1,000 again until January, 2017, after which it skyrocketed to $19,000 by the end of that year. It hit its all-time high of $68,000 in November, 2021, only to drop back below $35,000 two months later.
Time To Sell?
Given the immense volatility of the crypto market, and its recent downturn, perhaps you’ve had more than enough investment excitement to last a lifetime and are ready to cash out. However, despite whatever losses you may have experienced in the past few months, your cryptos undoubtedly are worth substantially more than when you bought them. Consequently, you may fear the long-term capital gains tax hit you’re likely to face.
For 2022, you’ll pay the 20% rate if you’re a married taxpayer filing jointly with your spouse and your combined annual incomes top $501,600. Not only that, but you’ll pay the additional 3.8% Medicare Tax and whatever percentage your state currently sets as its long-term capital gains rate (13.3% in California).
Therefore, assuming you live in California and make a $4 million crypto sale with a taxable gain of $3.7 million, that translates into a total tax due of $1,372,700. In other words, taxes will eat up a full 34.31% of your sale proceeds, leaving you only $2,627,300 to reinvest. Ouch!
The DST Alternative
What if you could sell your cryptos without paying any taxes whatsoever, thereby giving you the full $4 million to reinvest? Believe it or not, there’s a perfectly legal way to do just that.
It’s called the Deferred Sales Trust (DST) and is a proprietary installment sale strategy fully compliant with Section 453 of the Internal Revenue Code, the section that not only authorizes such sales, but also allows sellers who utilize them to defer their capital gains taxes over the life of their sale contract.
The DST doesn’t just save you the $1,372,700 tax hit you would otherwise face in the above scenario, as awesome as that is. It provides you with other advantages as well, including the following:
- You can diversify your investments into any “prudent” investment you choose, such as stocks, bonds, real estate, REITs or even life insurance.
- You can direct the terms of your installment sale contract and even change them in the future if you need to.
- You can be assured of receiving guaranteed monthly payments.
- You can incorporate your DST into your overall estate plan, thereby possibly avoiding probate as well as establishing an “estate freeze.”
Want More Information?
To find out more about how well the DST can serve you whenever you sell a highly-appreciated asset, cryptocurrency or otherwise, contact Reef Point today.