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  • Crypto Currency and Locking in Gains

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    Here's the scenario - you put money into BitCoin and the price has skyrocketed. You've made 2x, 5x, 10x, maybe 20x?

    But how do you get the money out? Most exchanges limit your conversion back to dollars or your ability to withdraw dollars out. Converting it to another crypto currency could be worse, you might end up owing tax without any cash to pay it. You can try to liquidate back to dollars, but is the market even big enough to do that? Or is this just a run up in price that looks nice but you'll never actually get to spend any of it?

    What if I told you that could lock in a portion of your gains immediately, in hard dollars, no matter happens to the price over the coming weeks and months?

    Welcome to tax land, my friends!

    Short version:

    You transfer the crypto currency, at the current valuation, to a donor advised fund (or a CRT, or a Pooled Income Fund, same concept). You get a current charitable deduction for the nominal value of the shares, saving you cash NOW (and in future years, depending on income levels).

    Wait, what's a donor advised fund?

    A donor advised fund is an investment account that is restricted to making distributions only charity. You still control the account and the investments, but all the money that comes out must go to charity. Like Benefunder.

    But, then I lose the money, right? I don't want to give away $100,000!

    Yup, but you might have lost it anyway. And it isn't worth as much as you might think. Some things to consider:

    If you transfer $100k, nominal value, you get an immediate tax deduction for $100k. You save, conservatively, 25% in taxes - you get $25k in cash for your shares. If you are in higher brackets, you could easily save $50k in tax on a $100k transfer.

    Don't forget, your $100k of currency isn't worth $100k to you. If you sell the $100k worth of crypto currency - you'll pay tax on that gain. Which means that you will only realize around $70k on a $100k sale anyways. So post-tax a $100k portfolio is only worth between $65k and $75k.

    How much of that $100k in nominal value do you think you'll be able to get out before the prices goes down? Or how long will it take to realize all that money? Granted, you probably don't want to move ALL the money over to a donor advised fund. But you could certainly hedge some of the gains - and do some GOOD with it as well.

    Advanced Version:

    Use a Pooled Income Fund (or in some cases a CRT). This is where you transfer a chunk of currency to a fund that is effectively a charity. But in this case, it is a charity that pays an income stream to you. Generally speaking, you don't get a full $100k deduction. It varies with age, but you could get as much as a $75k tax deduction, still saving you, around $25k. But you also get a $7,500 income stream each year. In this case, you swapped $70k (post tax value if you sell out) for a $25k tax deduction and an annuity for life worth $7,500 a year to you - likely a better deal that you'll get just trying to get cash out.

    Even More Advanced Version:

    Have IRAs? Donate a ton of your Crypto Currency and create a charitable deduction. Use that deduction to offset a ROTH IRA conversion  - you'll save a ton of money on the ROTH down the road.