Author Topic: How to reduce tax burden on a large bitcoin windfall  (Read 1638 times)

bitcoinadopter

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How to reduce tax burden on a large bitcoin windfall
« on: August 14, 2017, 12:18:06 PM »
I'm a bitcoin early adopter and recently I received an alt-coin(bitcoin cash) at no cost to myself. Everything I've read says that receiving this altcoin is a taxable event. Once received I converted it into bitcoins. The total value is about $200k which will all be taxed as regular income and put me in a rather high tax bracket as I already have other income for this year as well. I also have a substantial sum of bitcoins that I have not sold but will be taxed as long term capital gains when I do, and while this rate is low I'd still be paying 35% tax with state tax if I were to sell a significant quantity in order to diversify.

I am looking for ideas on how to reduce my tax burden. Currently I am thinking the simplest option would be to start a business and buy assets for said business. These assets would either yield passive income such as a house so I'd have a steady flow of income over the course of multiple years in a much lower tax bracket or assets I could buy now and sell for a similar price or profit in the future. I would also like to move to a state with either low or no income tax as currently I will owe 10% to the state which is a huge chunk for capital gains.

I do plan to speak to a professional but would love to get some feedback before I do and also would appreciate any advice on how to seek out an accountant or financial advisor who would be competent in guiding me on reducing this tax burden.

seattlecyclone

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #1 on: August 14, 2017, 03:07:54 PM »
Based on your mention of having $200k worth of Bitcoin Cash, I infer that you own somewhere in the ballpark of 500-1000 BTC. At current prices this puts your total crypto holdings at USD$2 million or possibly much more. You have won the game. Stop playing. Even if you owe 35% of the proceeds to various governments upon selling your coins, you'll still have well over a million bucks. Don't let the tax tail wag the dog. Bitcoins are quite volatile and speculative. You could easily be FI right now if you diversify your holdings. But having so much in BTC or any cryptocurrency, there's way too much uncertainty to credibly claim you're FI based on those holdings alone. Even if you're a true believer in the potential of blockchain technology in general, whether the BTC implementation of that technology will hold its value over time is something that nobody can really predict.

I don't know of any magic bullet to avoid the taxes, sorry. I suppose you could move to Washington or Texas or another state without income tax, and sell to save 10%. But the federal tax man will get his share, and I really believe that you're playing with fire letting that much of your net worth ride in one cryptocurrency just because you're afraid of the tax bill. Get at least USD$1 million out. Today. Or if you plan to move first, go get a U-Haul today and sell next week.
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GuitarStv

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #2 on: August 14, 2017, 03:11:49 PM »
Use the bitcoin as it was intended - to buy drugs.  Cut the drugs with household cleaning supplies, resell for cash.  :P

bitcoinadopter

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #3 on: August 14, 2017, 11:55:53 PM »
Based on your mention of having $200k worth of Bitcoin Cash, I infer that you own somewhere in the ballpark of 500-1000 BTC. At current prices this puts your total crypto holdings at USD$2 million or possibly much more. You have won the game. Stop playing. Even if you owe 35% of the proceeds to various governments upon selling your coins, you'll still have well over a million bucks. Don't let the tax tail wag the dog. Bitcoins are quite volatile and speculative. You could easily be FI right now if you diversify your holdings. But having so much in BTC or any cryptocurrency, there's way too much uncertainty to credibly claim you're FI based on those holdings alone. Even if you're a true believer in the potential of blockchain technology in general, whether the BTC implementation of that technology will hold its value over time is something that nobody can really predict.

I don't know of any magic bullet to avoid the taxes, sorry. I suppose you could move to Washington or Texas or another state without income tax, and sell to save 10%. But the federal tax man will get his share, and I really believe that you're playing with fire letting that much of your net worth ride in one cryptocurrency just because you're afraid of the tax bill. Get at least USD$1 million out. Today. Or if you plan to move first, go get a U-Haul today and sell next week.

I do intend to sell a large portion but even if the value of btc went to zero I would still be doing well. I had a job as a web developer and quit to travel and get into freelancing and could always easily get another well paying job I enjoy. I live a frugal life and am single and under 30. I would like to hold onto about half of them and see where it goes. Pretty much spot on I want to get out about a million.
« Last Edit: August 15, 2017, 01:02:06 AM by bitcoinadopter »

effigy98

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #4 on: August 15, 2017, 02:10:05 PM »
With the tax numbers you are talking about, I would hire a tax lawyer to help me protect as much as I can. Paying 35% on the gains would stress me out. I agree with seattlecyclone, you have won the game. You should be cashing out a large chunk and retiring soon and at the very least, cash out all your bitcoin cash that is probably going to zero. Also, I agree with the moving part if you are cashing everything out. A temporary situation to save 100k seems worth it.
« Last Edit: August 15, 2017, 02:15:38 PM by effigy98 »

katsiki

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #5 on: August 15, 2017, 05:53:40 PM »
I don't know much about bitcoin....  How does 200K in bc become 2M USD?
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seattlecyclone

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #6 on: August 15, 2017, 06:26:01 PM »
I don't know much about bitcoin....  How does 200K in bc become 2M USD?


Bitcoin recently forked into two separate coins: "regular" bitcoin, which is currently worth about $4,200, and "Bitcoin cash," which is worth about $300. Anyone who owned Bitcoins as of August 1st got the same number of Bitcoin Cash coins "for free." The value of these Bitcoin Cash coins is widely considered to be treated as income as of August 1st. Since a regular Bitcoin is worth more than 10x the value of a Bitcoin Cash coin, someone who earned $200k from the fork event can be inferred to own at least $2 million worth of regular Bitcoins as well.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

Roland of Gilead

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #7 on: August 15, 2017, 06:35:07 PM »
So in the future, could someone point out to me when these things are going to be so big?

Bitcoins were like $0.001 each a few years ago.  I could have bought 5000 with the change in my car cigarette dish.

bitcoinadopter

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #8 on: August 16, 2017, 03:52:11 PM »
So in the future, could someone point out to me when these things are going to be so big?

Bitcoins were like $0.001 each a few years ago.  I could have bought 5000 with the change in my car cigarette dish.

Heh I had been urging friends to buy a couple since $10 and now all the friends I told to buy back then are trying to buy now at $4k. Be fearful when others are greedy and greedy when others are fearful has been my moto and has worked out well.

bitcoinadopter

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #9 on: August 16, 2017, 03:53:05 PM »
With the tax numbers you are talking about, I would hire a tax lawyer to help me protect as much as I can. Paying 35% on the gains would stress me out. I agree with seattlecyclone, you have won the game. You should be cashing out a large chunk and retiring soon and at the very least, cash out all your bitcoin cash that is probably going to zero. Also, I agree with the moving part if you are cashing everything out. A temporary situation to save 100k seems worth it.

Have any advice on how to a good tax lawyer? I don't know anything about what to look for.

seattlecyclone

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #10 on: August 19, 2017, 09:27:37 AM »
Good thing you sold your Bitcoin Cash when you did, there would have been so much more tax to pay if you had waited until now.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

effigy98

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #11 on: August 25, 2017, 09:48:31 AM »
I give up trying to predict what is going up and down. I cannot believe BCH is doing so well. I made the same mistake on monero. Just going to hang on to every coin and diversify as much as possible.

sokoloff

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Re: How to reduce tax burden on a large bitcoin windfall
« Reply #12 on: August 29, 2017, 04:09:45 AM »
Is the receipt of Bitcoin cash a taxable ordinary income event or the receipt of a new capital good with a basis split from your BTC holdings?

I would tend to argue the latter. If you had a basis of $11 in BTC, you might now have a basis of $10 in BTC and $1 in BCH. I would look to how stock spin-offs are accounted for. I'm not a tax pro.