Bitcoin Sale: State Capital Gains Tax vs. No State Capital Gains Tax
When you sell your highly appreciated Bitcoin or other cryptocurrency, capital gains taxes can eat away a significant percentage of your return. As an investor, you’re likely all too aware of this.
Today’s Federal Long-Term Capital Gains Rates
- 0% if you have an annual income of up to $40,000 and file as an individual
- 0% if you have an annual income of up to $80,000 and file jointly with your spouse
- 15% if you have an annual income of $40,001–$441,450 and file as an individual
- 15% if you have an annual income of $80,001–$496,600 and file jointly with your spouse
- 20% if you have an annual income of $441,451 or more and file as an individual
- 20% if you have an annual income of $496,601 or more and file jointly with your spouse
- 3.8% Medicare tax
Plus keep in mind, most states assess their own taxes. California is as high as 13.3%. When you sell appreciated property, only the following states levy no state income or capital gains tax:
- New Hampshire
- South Dakota
The Bombshell Difference
Let’s compare a married couple’s sale of their highly appreciated business in two states — California and Nevada — to explore if there is a significant difference a state capital gains tax can make in the number of sale profits you get to keep. Let’s assume the following for both sales:
- Bitcoin sale nets $20 million
- The seller’s initial basis was $1 million
- Taxable gain of $19 million
- The federal capital gains tax rate is 20%
- The Medicare tax rate is 3.8%
If no tax planning were set up prior to the sale, the Nevada couple will pay $4.522 million in taxes, leaving $15.478 million in net income to reinvest. The California couple, on the other hand, will pay an additional $2.527 million in taxes (13.3% state capital gains tax), leaving only $12.951 million in net proceeds to reinvest. California’s tax makes a $2.524 million difference.
There’s a Better Way
You can defer capital gains tax on the sale of Bitcoin without moving to Puerto Rico. Using a Deferred Sales Trust, you can defer capital gains tax, both federal and state, on the sale of Bitcoin or other cryptocurrencies no matter where you live. In a way, the Deferred Sales Trust is a way to keep your freedom of living where you want to while still being able to enjoy tax deferral and the ability to grow your wealth.
Let’s apply this to the identical hypothetical sale of Bitcoin above for $20 million and the couple has a $19 million gain. A Deferred Sales Trust offers this same couple who lives in California or Nevada an extra $7.049 million (CA) or $4.352 million (NV) of funds the DST can reinvest as they desire, regardless of the state in which the sale happens.
Case Study: Silicon Valley Couple Sells Ethereum & Defers Millions in Tax
Steps the Couple Took Using the Deferred Sales Trust
- The couple purchased Bitcoin and Ethereum for on average over five years around $100,000. They did not qualify for a 1031 exchange. The value increased by millions of dollars.
- Prior to selling the coins for cash, the coins were transferred to the Deferred Sales Trust™ (DST) Crypto Exchange Account, including an extra $1.5 million of value to defer capital gains tax.
- Some of the funds will be invested into active real estate in Lake Tahoe, CA, which has been a dream for this couple for over 20 years.
Ready to see if this is a good fit for your situation? Schedule a no-cost consultation with an exclusive DST trustee to learn about all the benefits of the DST. Goals for the meeting:
- Hear your story!
- Understand your financial and investment goals.
- Evaluate if using the Deferred Sales Trust to sell your highly appreciated asset will make sense for you and serve as the best solution to your tax deferral goals.
Please note the minimum-size deal for a DST is $1 million net proceeds and $1 million gain. However, if you have two assets that add up to this amount, you qualify.
Happy tax deferring!
About the Author:
Brett Swarts is considered one of the most well-rounded Capital Gains Tax Deferral Experts and informative speakers in the U.S. He is the Founder of Capital Gains Tax Solutions, is an exclusive Deferred Sales Trust Trustee, host of the Capital Gains Tax Solutions & eXpert CRE Secrets podcast, and an eXp Commercial Multifamily Broker in Sacramento, CA.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.