First, some advice for beginners:
If you are already a crypto 1%er, good for you. But if you are just starting out and reading stories of other investors’ astronomical returns, it is essential to understand that this is a case of survivor bias. For every story of rags to riches, there are 99 stories of people who lost everything. This also applies to crypto assets. For every coin with a 100x return, 1000 tokens crashed to zero. If you like gambling, fine, but don’t pretend to be an informed investor through trading advice from YouTubers.
That said, here is one way to eliminate crypto tax liability for crypto millionaires:
This approach will allow you to retain 100% of your crypto with zero tax liability. Here’s how it works:
2: Joe donates his cryptocurrency to the CRT. Joe receives a tax credit for his donation that he can use against future capital gains.
3: The trust can sell the cryptocurrency completely tax-free - or grow it tax-free. There’s no longer a need to sell it to pay taxes.
4: The trust will pay an annuity to Joe and his partner for the rest of their lives. (The annuity income is taxed – but at a much lower rate.)
5: When Joe dies, any remaining funds are donated to a charity of his choice.
6: If Joe’s children don’t like the idea of leaving his assets to a charity, Joe can use the income from the CRT to pay for a permanent life insurance policy that will pay out on Joe’s death. Life insurance payouts are tax-free.
Using this CRT calculator
, we can enter the numbers from Joe’s situation, and see a total tax avoidance of $600,000, a tax deduction of $221,000, and a total after-tax income of $5.4 million. Joe can live off $180K per year for the rest of his life and only pay tax on his annuity income.