If you’re an investor with a high tolerance for risk, you likely have invested in one or more digital currencies, i.e., cryptocurrencies, in the past decade or so. Bitcoin, the granddaddy of them all, only appeared in 2008. Today, however, you have over 6,700 different publicly traded cryptocurrencies to choose from. Their total value, as of Feb 18, 2021, was more than $1.6 trillion. On that date, Bitcoin alone was worth over $969.6 billion.
As you know, however, cryptocurrencies are an extremely speculative and volatile investment. While the adrenaline rush you get when the value of yours reaches stratospheric levels probably exceeds any other investment high you experience, the sudden precipitous drops in value that all cryptocurrencies go through may make you feel more like you’re having a heart attack.
Taking Bitcoin as an example, if you bought $10,000 worth (about 75 Bitcoin tokens) in February of 2013 and held on to them, your $10,000 investment would have appreciated to over $721,000 five years later. Holding on to them until February of 2021 would have given you a total value of about $3,375,000. On the other hand, on the majority of days between 2013 and 2021, your investment would have gained you little, if any, profit.
Such is the nature of cryptocurrencies. And owning them can be a double-edged sword. Either they’re worth “nothing” and you’ll lose the vast majority of your investment or you face paying hundreds of thousands of dollars in capital gains taxes. For instance, the capital gains tax on that $10,000 Bitcoin investment that’s now worth $3.375 million would cost you well over $1 million.
What’s an investor to do?
Enter the Deferred Sales Trust
If you currently own highly appreciated cryptocurrencies, you may be tired of the extreme volatility of these investments and wish you could sell at least some of them and use the money to buy less risky investments or even take out some cash. If that seems unfeasible, however, given the capital gains liability you face, you need to know about the Deferred Sales Trust.
This innovative exit strategy allows you to sell some of your highly risky but vastly appreciated cryptocurrencies while deferring your capital gains taxes and letting you diversify your investment portfolio. Perfectly legal and completely safe, a DST may well be just what you’re looking for.
DST Process
If you’re seriously thinking about selling some of your cryptocurrencies, now is the time to contact Reef Point. Remember, setting up your DST takes some time and planning. First you meet with our Estate Planning Team and the professionals who will create and then manage your personalized DST. Once created, you we work with you to set up a secure account environment whereby sell your cryptocurrencies to the trust when they have reached a certain value, which then sells them on your preferred exchange. You receive a secured DST installment note in exchange, which sets forth what payments you will receive from the trust and when you will receive them. The Trust will then invest the proceeds into other diversified asset classes, but only as approved by you.
Since the sale proceeds come into the trust rather than coming to you, you face no capital gains liability until and to the extent you begin receiving installment payments. Then you pay only the amount of capital gains that each installment payment represents.
How is the Crypto Owner protected in the Transaction?
There are a number of ways in which you are protected after the transaction is completed but the initial and most important factor is that you will never have to share your crypto password or expose your wallet for us to secure the tax deferral you are seeking. Beware of any copycat strategy that requires or encourages you to do so.