Valur Crypto Tax Planning Guide



About tax planning and why should you take advantage of it 

How much money are you leaving on the table by not thinking about tax planning? For reference, someone who is realizing a ~$1.5M capital gain could earn an additional $2.7M in the future by using tax planning structures compared to simply selling the assets in their name.

Graph of growth of investments inside and outside Charitable Remainder Trust

We get it: there's nothing simple about taxes. Valur is here to help you keep more of your hard-earned gains by taking the sophisticated tax planning and asset protection tools of the ultra-rich and making them seamless and accessible to everyone.

No matter your timing – if you’re still holding your crypto assets and you’ve got a big gain coming, or if you have taken gains off the table in a recent bull run or received a large amount of income from selling an NFT -- Valur will help you set up the right tax planning structure

In this guide, we’ll focus on the characteristics of two useful structures, and we’ll also use a few examples to help you visualize the benefits and the tradeoffs of each one. 

Tax planning for unrealized gains: Charitable Remainder Trusts (CRUTs)

The basics

CRUTs are tax-exempt accounts for appreciated assets you have not sold yet. Their key benefits are:

1. Tax deferral: Most gains inside the trust are not taxed, enabling you to avoid paying taxes upfront when you sell your crypto assets so you can keep reinvesting those tax dollars until you receive a distribution from the trust, allowing more tax free growth and compounding.

2. Lower tax rates: by realizing your gains over a number of years, you can effectively smooth out your income and avoid spiking your tax rates in any individual year. In exchange for donating some of the money in the trust to a charity of your choice at the end, you also get an immediate tax deduction from the government.

3. You can use your money to make the same investments you would if you were investing out of a taxable account.

CRUTs are like a more flexible IRA, but they have no contribution limit and they allow you to use your money today instead of having to wait until you are 59.5. It’s true that you are only entitled to a certain amount of distributions from the trust per year, but you can always borrow against or sell your future trust income if you need even more, as explained in this article).

Timeline and distribution strategy 

There are another two key decisions to make when establishing a CRUT.

Length. This determines how distributions to beneficiaries will be made and can be either for the remainder of your lifetime or for a period between 1 and 20 years. You can visit our blog post on this topic here if you’re interested in learning more about the benefits and trade offs of Lifetime vs Term Trusts.

Distributions. There are multiple distribution strategies, and your choice affects the consistency of your distributions and the return you get from the structure. If you’re interested in learning more about the 3 available structures and how they compare to each other, please visit our post on the topic.

Real life example 

Like a lot of our customers, Carlos (28), who lives in New York City, caught the crypto wave relatively early: he bought a few Bitcoin in 2016 and also amassed a decent-sized stake in ETH. He has invested $250k in the crypto he currently holds, his holdings are now worth about $4.5M, and he's now looking to diversify, so he wants to sell half of his portfolio relatively soon.

If he just sells his crypto assets without doing any tax planning, Carlos will owe the federal government and New York (city and state) about $750k, so he works with Valur to put them into a CRUT today. By doing so, he’ll:

1. Receive an immediate tax deduction of about 10% of the current value of the assets he puts into the trust. In this case, that's a $225k deduction and that deduction translates into cash savings of about $90k on next year's taxes.

2. Get to defer all of the taxes—state and federal—he would otherwise have owed on his big sale. Instead of paying that $750k in taxes, he is able to keep that money, reinvest it and let it grow. 

3. Have access to a growing share of his money every year, starting as soon as he sells his crypto: every year after he sells, he'll be able to cash out a set percentage of the trust's current value.

What would all these mean for Carlo’s bottom line? If he keeps his money in a regular taxable investment account, he will end up with about $21.3M after taxes. If instead he puts them into a CRUT today, he will end up with about $30.4M in his pocket. So even after donating a decent chunk to charity, Carlos will still pocket an extra $9.1M just by putting his crypto into a trust before he sells it.

Graph of growth of investments inside and outside Charitable Remainder Trust

If you'd like, you can read Carlo’s detailed example here and we also invite you to check out your potential tax savings with our online calculator.

Tax planning for realized gains: Grantor Charitable Lead Annuity Trusts (CLATs)

The basics 

So you decided to sell your crypto without much forward planning, and now you’re expecting a big tax bill. Are you too late for tax planning? Not at all!  CLATs are tax-exempt accounts that can earn you additional returns of 50% or more even if you've already sold your crypto assets.

With a CLAT, you can:

1. Back-load your tax obligation. You pay a very small amount every year and defer your big tax bill until the final year of the trust. 

2. Use your money to make the same investments you would make if you had a regular taxable account.

Grantor CLATs are in many ways the reverse of CRUTs. Instead of making payments to you (or another individual) and then distributing the remainder to charity, a CLAT involves small donations to charity every year and a larger donation at the end of the trust’s term, and then you receive the remainder of the assets after that final contribution.

Interested in learning more about these structures? Visit our article where we explain how they work and in what sorts of situations they might prove valuable.

What are the downsides of CLATs?

An important trade off for CLATs is that the money is locked away for the entirety of the trust's term, much like a retirement savings account or IRA. At the same time, you are responsible for the taxes on the trust’s income, so this means that you may have to pay taxes on that income out of pocket each year.

With that said, this shouldn't be a huge concern, as the amounts we're talking about are small: in most cases, the trust's income will be a few thousand dollars a year, and your tax bill will be a fraction of that. 

Real life example

Like a lot of our customers, Jeff who lives in the Bay Area, started trading crypto a few years ago and has had a really good year. He decided to take some of his gains off the table - about $300k - but he didn't realize that they all qualify as short-term capital gains. As a result, he's now looking at a surprise 49.25% tax bill.

There is good news, though: Jeff can work with Valur today and use a CLAT to eliminate his short-term-gains taxes this year, reinvest that money now, and pay most of his taxes at a lower tax rate in the future. By doing so:

1. He´ll get to deduct about 100% of the current value of the assets he puts into the trust and get to reinvest the money. In this case, that's a $300k deduction that translates into a cash savings of about $150,000 on this year's taxes. 

2. He´ll be able to lower his tax rate by shifting income from short-term capital gains to long-term capital gains. He´ll accomplish this by (1) using his future charitable donations to write off his very high (and very highly taxed) income this year and (2) re-investing those tax savings in assets that, when sold, will be taxed at lower rates.

So, what would all of these mean for Jeff's? If he pays his taxes upfront and reinvests the remainder after taxes, after 30 years of conservative 8% growth, he will end up with about $825k after taxes. If instead he chooses a Charitable Lead Annuity Trust today, he’ll end up with $1.7M in his pocket and about an extra $400k will go to the charity of his choice, so much more than he would have if he had just paid his taxes in year 1!

Interested in reading more? Please visit our blog post for a detailed example of Jeff’s situation.

CRUTs vs CLATs: the different use cases

The biggest question for most customers is which strategy they should use. The answer, in most cases, depends on one main factor: Is your big win still in the future, or is it in the past? 

As a summary, CRUTs have the following characteristics: 

  • They are best suited for individuals with highly appreciated assets who are aiming to mitigate their tax exposure BEFORE a major liquidity event.
  • You typically receive a charitable deduction of ~10% of the value of the assets you put into the trust.
  • You are entitled to a distribution of a set percentage of trust assets every year the trust operates, while the charitable beneficiary receives whatever is left in the trust at the end of the term.
  • Gains inside the CRUT are tax exempt (outside of a few edge cases).

CLATs, by contrast, meet the following conditions: 

  • They are best suited if you are looking to mitigate tax exposure AFTER a major liquidity event.
  • You receive a charitable deduction up to 100% of the value of assets you gift to the trust.
  • They distribute a set amount to a charitable beneficiary every year and you receive what is left in the trust at the end of the term.
  • The trust is not tax exempt and you are taxed on gains in the trust

About Valur

Valur has a singular goal: to help our customers access tax planning structures that are otherwise inaccessible to them. From picking the best strategy to organizing your distributions and other important financial events, we'll be with you the whole way.

We have built a system to streamline the tax planning tools of the ultra-rich to make them seamless, affordable and accessible to everyone. We’re the only providers of crypto-focused, technology-first tax planning tools. 

What we offer:

  • Simplicity and speed: comprehensive trust structuring to maximize tax protection and completed, vetted legal documents to establish the trust
  • Trust administrative management (federal and state filings, trust accounting and distribution management)

If you would like to learn more, please feel free to check out our Frequently Asked Questions section, our Learning Center, check out your potential tax savings with our online calculator or schedule a time to chat with us!

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Tip

You can choose from different types of Charitable Remainder Trust, including Standard, NIMCRUT, and Flip CRUT.

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