Cryptocurrencies are attracting tremendous attention by investors. The increased ability to use cryptocurrency for transactions as well as the expectations of greater value are attacking more investors.
A rapidly growing number of single-family offices are adding cryptocurrencies to their asset allocation models. In some cases they are incorporating cryptocurrencies to provide greater diversification and to offset loses in other assets. Still, short-term federal capital gains tax rates are around 40% and long-term federal capital gains tax rates are approaching 25%. Additionally, there are potential state taxes on the gains.
To mitigate these taxes, many single-family offices are marrying sophisticated wealth planning strategies with these investments. A number of different wealth planning strategies are being employed including using opportunity zones and investing through private placement life insurance.
According to Anthony Glomski, founder of AG Asset Advisory/Family Office, “By triggering a significant capital gain and investing the proceeds into an opportunity zone fund, cryptocurrency investors can delay and reduce taxes. If the fund is held for 10 years or longer, there are no taxes owed on the newly acquired asset once it is sold. This can result in a massive increase in their annualized returns when compared to a taxable strategy. In the right circumstances, cryptocurrency investors can do extremely well. However, it’s important they realize that they’re no longer investing in cryptocurrencies when they use this strategy.”
Another strategy is to use cryptocurrency investments within a private placement life insurance policy (PPLI). “With PPLI, wealthy families are able to decide on who manages the monies building up within the policy,” says Frank Seneco, president of Seneco & Associates, a world renowned authority on private placement life insurance, “It’s important to understand that while PPLI is a very powerful way to legally eliminate the taxes on investment gains, it’s more than that. PPLI is regularly a way for wealth planners to help optimize the financial world of the wealthy.”
While there is a strong emphasis on tax mitigation at many single-family offices, there are other ways single-family offices are managing their cryptocurrency positions. “Hedging is increasingly common among very wealthy cryptocurrency investors such as family offices,” says Glomski. “The complication is that many forms of traditional hedging strategies are ineffectual. Sophisticated family offices are constructing hedges that limit the downside while enabling them to continue to own the investment.”