The CRT: Your Path to Tax-Free Investing

Many investors plan exit strategies for their crypto over the next year, hoping the bull market will continue.

Everyone's wondering how they minimize their tax implications.

It's called a Charitable Remainder Trust, or CRT.

For many high-income investors, a CRT has become one of the smartest ways to minimize taxes and build wealth.

This applies not only to crypto but also to stocks, real estate, and more.

This is particularly beneficial when selling assets with significant gains, as capital gains taxes can significantly reduce your profits.

Here's why.

The Tax Burden on High-Gain Assets

When you sell an asset like crypto or real estate, you face a long list of potential taxes.

First, the Federal Long-Term Capital Gains tax is up to 20%. The exact rate depends on your income bracket.

Then, if you've crossed certain income thresholds, you'll add an extra 3.8% tax for the Net Investment Income (or "ObamaCare" tax).

On top of that, you'll owe state taxes on your gains, which vary depending on where you live. In states like California, that could mean up to 13.3% more (as of 2024).

And if you sell before holding for a year, you're taxed at the much higher short-term capital gains rate.

It can be up to 37% or even higher. That's a huge hit.

How a CRT Reduces Taxes on Big Sales

With a CRT, you avoid most of those taxes upfront.

The CRT is structured to benefit a charity eventually. As a result, there is no capital gains tax when the trust sells the assets.

That means you keep the entire sale amount, giving you far more capital to reinvest.

Let's say you're selling $1,000,000 in appreciated crypto, which you originally bought for $50,000.

You owe approximately $280,000 in combined federal and state taxes (assuming top tax brackets and a high-tax state).

This amount can vary significantly based on your circumstances and state tax rates.

With a CRT, you keep that full $1,000,000 to reinvest with zero initial tax owed.

You can invest that entire amount within the CRT and watch it grow tax-deferred.

The Flexibility of Charitable Remainder Unitrusts (CRUTs)

And here's what's interesting for crypto investors.

The Charitable Remainder Unitrust (CRUT) is especially appealing among the CRT types available.

A CRUT recalculates its value each year, which means it can adjust your annual payouts based on growth in the trust's assets.

This adaptability is a key advantage of CRUTs, especially in volatile markets like crypto.

For investors who like to stay involved, a CRUT also allows you to actively manage and reinvest within the trust, including back into crypto.

While a CRUT offers some flexibility for investment management, there are restrictions on how the assets can be managed.

It is important to note that the trust must distribute a minimum percentage (between 5% and 50%) of its value each year to non-charitable beneficiaries.

The trust's value is assessed annually, and you receive an income based on this value.

This keeps your payout potential high if your investments perform well.

Unlike other CRTs, CRUTs adapt rather than lock in a fixed annuity, giving you more control.

Additional Benefits of a CRT

And the benefits of a CRT go beyond just tax savings.

Because the CRT assets belong to the trust, they're protected from creditors, offering an extra layer of asset security.

When establishing the trust, you'll also receive a current tax deduction for your charitable contribution.

The charitable remainder must be at least 10% of the initial fair market value of the assets placed in the trust.

You're making a charitable impact by designating the trust's remainder to a charity of your choice over time.

What About Taxes on CRT Distributions?

But will you still pay taxes?

Yes, but only on distributions you receive from the CRT.

Distributions from a CRT are taxed based on the order in which the trust earns income: ordinary income, capital gains, and tax-exempt income.

This can often result in a lower overall tax rate.

So, if you're planning a major exit soon, it's worth exploring how a CRT might fit into your tax strategy.

Setting Up a CRT: What to Know

Setting up a CRT requires creating the trust, choosing a charity, and working with a trustee to handle the assets.

It is important to understand that a CRT is irrevocable once established, meaning you cannot change its basic terms or reclaim the assets.

Timing is critical. Ideally, you should establish the trust before your asset is under contract for sale.

For those who want to maximize their net worth, a CRT might be the exact tool you need.

To learn more about whether a CRT is right for you, consider talking to a qualified financial advisor, tax professional, or estate attorney who understands this strategy inside and out.

Because the opportunity to reduce your tax bill and grow your wealth over time could make a world of difference in the years ahead.