If you’re invested in cryptocurrency, you know that you can make huge profits on these types of nonfungible tokens (NFTs). For instance, Bitcoin, the original cryptocurrency, recently went from $30,000 per coin to $60,000 earlier this year.
But what you may not know is that new rules on how and when your cryptocurrencies are taxed went into effect in June.
Current Cryptocurrency Taxes
Up until now, cryptocurrencies and other NFTs were considered property on which you paid either short-term or long-term capital gains taxes when you sold them, depending on how long you’d owned them prior to sale. If you’re like most cryptocurrency investors, you buy and sell frequently due to the market’s extreme volatility. Consequently, most of your capital gains taxes likely have been of the short-term variety, i.e., taxed at the same rate as your ordinary income. For 2021, this means 37% if you are a married couple filing jointly with an income of over $523,600.
Assuming you’ve held your cryptocurrencies for one year or longer before selling them, however, you face paying a current top long-term capital gains rate of 20%.
Under the Financial Action Tax Force Recommendation #16, commonly called the FATF Travel Rule, the capital gains tax rates don’t change, but when they apply do.
Specifically, the Travel Rule requires all financial institutions and crypto companies to gather not only your name and account number, but also at least one of the following personal data items from you:
- Physical address
- Unique ID number
- Customer identification number
- Date and place of birth
Once collected, this data then follows you whenever you make a purchase, sale or trade. In other words, your personal information travels with you wherever you go and whatever you do in the crypto world. In addition, when you sell, you will be required to provide the name and account number of whoever you’re selling to.
Furthermore, your NFTs could be considered collectibles, resulting in a top long-term capital gains tax rate of 28% instead of 20%.
Experts strongly recommend that you consult a tax and investment professional before buying, selling or exchanging cryptocurrencies or NFTs.
DST to the Rescue
Here atReef Point, not only do we agree with the experts, we are, in fact, one of the few tax and investment professionals who can offer you a safe, legal and tested way to defer your capital gains taxes when you sell or exchange your highly appreciated cryptocurrencies. How? By transferring them into a Deferred Sales Trust (DST) instead of directly selling them to or exchanging them with your intended recipient.
While most investors use the DST as an exit strategy when selling real estate, a business or some other high-value asset, or as an alternative to a 1031 exchange, it works just as well for your cryptocurrency and NFT sales and exchanges. In addition, it offers you numerous advantages other than capital gains tax deferral. For instance, it allows you to diversity your investment holdings and/or receive the income you need for retirement.
Want to Learn More?
Whatever your cryptocurrenty concerns, contact Reef Point today. We’ll be happy to thoroughly discuss your situation with you and put you on the road to true financial independence.