The question of whether a charitable remainder trust (CRT) can be funded with cryptocurrency is increasingly relevant as digital assets gain mainstream acceptance, and the answer is complex, but generally, yes, with careful consideration and adherence to evolving IRS guidelines. While the IRS hasn’t provided exhaustive rules specifically addressing crypto in CRTs, the existing framework for valuing and transferring property applies, though with unique challenges. A CRT allows donors to receive an immediate income tax deduction while designating a portion of the trust’s future value to a qualified charity; however, the IRS requires that the donated asset be “includible in gross income” if sold, and determining that for volatile crypto is the first hurdle. As of 2023, roughly 19% of Americans report owning some form of cryptocurrency, highlighting the growing need for clarity on how these assets can be integrated into estate planning tools.
What are the valuation challenges with cryptocurrency donations?
Valuing cryptocurrency for a CRT presents unique issues due to its inherent volatility and lack of established market pricing. Unlike stocks or bonds, crypto prices can fluctuate dramatically within short periods, making it difficult to determine a fair market value for the donation. The IRS generally requires that the value be determined as of the date the asset is transferred to the trust, which necessitates a robust appraisal from a qualified expert. Furthermore, tracking the cost basis of the cryptocurrency is critical for calculating capital gains or losses; without accurate records, the donor could face tax implications. According to a 2024 report by Chainalysis, illicit cryptocurrency transactions accounted for only 0.16% of all crypto activity, showing increasing maturity and legality in the market, though proper record keeping remains essential. A properly constructed CRT needs to account for these potential fluctuations and ensure compliance with IRS regulations.
How does the IRS view cryptocurrency as ‘property’?
The IRS officially recognizes cryptocurrency as “property,” not currency, for tax purposes, as outlined in Notice 2014-21. This classification is crucial because it means that cryptocurrency transactions are subject to capital gains taxes, similar to the sale of stocks or real estate. When a CRT is funded with crypto, the trust is considered to have received a property contribution, and the donor is entitled to an income tax deduction based on the fair market value of the crypto on the date of the transfer. However, the IRS scrutinizes donations of illiquid or difficult-to-value assets, so a thorough appraisal and documentation are essential. It’s important to remember that the trust may be subject to capital gains taxes when it eventually sells the cryptocurrency to fund the charitable remainder. “The IRS is increasingly focused on digital asset transactions, and ensuring compliance is critical,” a recent statement from the Treasury Department emphasized.
What happened when Mr. Harding tried to donate Bitcoin without planning?
Old Man Harding, a retired software engineer, was an early adopter of Bitcoin. He believed strongly in the power of technology and wanted to leave a legacy to the local animal shelter. In 2016, flush with gains from an early investment, he decided to fund a CRT, transferring a substantial amount of Bitcoin directly to the trust without a proper appraisal or consultation with an estate planning attorney. The Bitcoin’s value surged in the following years, but the trust administrators struggled to navigate the complex tax implications when it came time to distribute funds to the charity. The IRS questioned the initial valuation, triggering a lengthy audit and significant legal fees. Mr. Harding, frustrated and overwhelmed, realized that his good intentions were overshadowed by a lack of foresight, and the animal shelter received significantly less than he had hoped. He lamented, “I thought I was doing a good thing, but I ended up creating a mess.”
How did the Millers secure their legacy with a properly structured crypto CRT?
The Millers, a philanthropic couple, were inspired by Mr. Harding’s experience but determined to avoid the same pitfalls. They consulted with Ted Cook, an estate planning attorney specializing in digital assets, to create a carefully structured CRT funded with Ethereum. Ted advised them to obtain a professional appraisal of their Ethereum holdings as of the transfer date, documenting the methodology and assumptions used. He also recommended establishing clear guidelines for the trust’s management and distribution of funds, including a strategy for selling the crypto at a favorable time. By proactively addressing these issues, the Millers ensured that their CRT complied with all IRS regulations and maximized the benefit to their chosen charity, the San Diego Wildlife Alliance. “We wanted to make sure our donation made a real impact,” Mrs. Miller explained. “Ted’s expertise gave us the confidence to move forward with our plan.” The trust is now thriving, funding critical conservation efforts, and solidifying the Millers’ legacy of giving.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
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