Tax lawyer Robert R Wood of San Francisco-based Wood LLP, has written an article that describes a possible crypto tax loophole for investors in the US, partially due to a US Supreme Court ruling on trust income.
This comes after the landmark case of North Carolina Department of Revenue vs Kimberley Rice Kaestner 1992 Family Trust, whereby the US Supreme Court came to a unanimous decision that said: “a state could not tax out-of-state residents on trust income without minimum contacts”.
All this relies on Bitcoin being treated by the Internal Revenue Service (IRS) as property, meaning that each transfer triggers a tax hit to both parties of the transfer. For crypto investors, some put them in legal entities as well as in trusts. Wood points out that there are several ways to tax a trust, depending on the type, and that living trusts, typically used to plan estates, were not taxed separately.
And here lies the crypto tax loophole. He wrote:
“So, if you transfer Bitcoin to your living trust, it usually isn’t a taxable transfer, since your living trust isn’t really a separate taxpayer. It is still you, so you still report the gain or loss on a later sale on your personal tax return. There are also nongrantor trusts, in which the transferor is not taxed on them. These are separately taxed, and a separate trust tax return must be filed.”
He does warn that trusts still have to pay taxes itself, and US persons shouldn’t assume they can avoid US taxes via foreign trusts, although it could be possible to arrange for a lower corporate tax rate of 21%, rather than individual tax rates.
And that doesn’t even take into account state taxes! State taxes differ by state and some are more favorable than others. California, for example, has a pretty high 13.3% state tax but a new trust set up in Nevada or in Delaware could be a lot more agreeable. Nevada’s Incomplete Gift Non-Grantor Trust (NING) and Delaware’s DING and even Wyoming’s WING ensures that donors make incomplete gifts to the trust, and there is an independent trustee for the trust.
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