Bitcoin, along with the rest of the “crypto” universe of assets is down roughly 75% from recent highs.
 
Many of your clients who own Bitcoin or similar assets will have losses.
 
However, those who have been invested for a longer time may still have huge gains.
 
Fundamental Value
There is a strong case that the fundamental value of issues like Bitcoin is zero. Here is a short argument for that case.
 
The bullish case for crypto “currencies” is that they, or one of them, will become the commonly used medium of exchange. That is, they will become money.
 
Money, by definition, is that asset in an economy which is the most liquid and is the most widely accepted asset in exchange. In the US, the dollar is money, and nothing else is money. For example, credit cards, checks, ACH, bank wires, and PayPal are all methods of payment. But what is paid is dollars.
 
Historically, going back to the at least to the time of Alexander the Great (he died 2500 years ago), money has always had a relatively stable value. When money ceases to have a stable enough value, it ceases to be used as money. (We wrote a book on inflation, available here, if you want to read over 100 pages on the history of money).
 
Demand for Crypto
People demand money because they want to use it for transactions, in the present or in the future. (See, e.g. chapter 17 of Human Action, by the 20^th century economist Ludwig von Mises.) To serve this role, and therefore to be demanded, the exchange value of money must be relatively stable.
 
People demand crypto, so it seems, for precisely the opposite reason. They demand crypto as a speculative asset. Most people (possibly excluding a small number of aficionados, and some unknown number of criminals) buy and hold crypto because they believe (or hope) that it will go up in exchange value. That is, they buy (if they buy) say Bitcoin at $16,000 because they believe (or hope) that it will go up to (say) $30,000 in a short period of time.
 
We believe that “crypto”, at least in the form of issues like Bitcoin, is not a currency, and is unlikely to be a currency. When people stop holding Bitcoin and similar cryptos because they believe the exchange value (i.e. the price in money) will rise, we believe the demand for such cryptos will virtually disappear. In that event, the value could go toward zero.
 
US Taxation
Bitcoin (and presumably other similar cryptos) are in the US taxed as capital assets. That means, for example, that if a client owns a Bitcoin with a basis of $1000, and uses it to buy a car for $16,000 (to use a current market price of a Bitcoin), that client will have a taxable capital gain when he “purchases” the car with the Bitcoin.
 
That’s the downside of capital treatment.
 
The upside is that it is possible to avoid taxation on the sale of crypto held for long term gains by using one of several appropriate techniques.
 
Section 664
One such technique is to contribute the appreciated crypto to a trust that qualifies as tax exempt under section 664 of the code.
 
Capture AUM
For clients who have appreciated crypto, a 664 trust can be a great opportunity to take profits without incurring tax. And for advisors, such a trust can be a great opportunity to gather AUM, while helping a client take profits, avoid tax, and diversify out of a highly risky asset.
 
If you think a Sec. 664 Tax Exempt Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.