Nick Bertha: Five Essentials of Cryptocurrency Wealth Transfer
An Interview With Tyler Gallagher of Authority Magazine
June 27, 2022 – Over the past few years, the Cryptocurrency industry has been making headlines nearly every week. Many people have gotten very wealthy investing or leading the cryptocurrency industry. At the same time, many people have lost a lot investing in the industry. In addition, more people have been scrutinizing the ecological impact of crypto mining, as well as its potential facilitation of illegal activity. What is being done and what can be done to address these concerns?
In this interview series called “5 Things You Need To Understand In Order To Successfully Invest In Cryptocurrency” we are talking to leaders in the cryptocurrency industry, as well as successful investors, who share insights from their experience about how to successfully invest in Cryptocurrency.
As a part of this series, I had the pleasure of interviewing Nick Bertha, Director of Wealth and Trust Planning.
Mr. Bertha works with Fieldpoint Private Securities, LLC clients on complex estate and income tax issues, and helps ultra-high-net-worth families manage their wealth. He has expert-level capability in tax law, wealth transfer, and trusts & estates. His extensive career, spanning over 30 years, includes prominent positions at Credit Suisse, DLJ and US Trust Company, where he led the Financial Counseling Group for many years. His work has been published in leading journals including Trusts & Estates Magazine and the Tax Lawyer. He is currently on the Conference Board of the Trust & Wealth Management Division of the American Bankers Association. Mr. Bertha has a BA and JD from Marquette University and a MS in Taxation from the University of Wisconsin, Milwaukee campus.
Check the background of this investment professional on FINRA’s BrokerCheck.
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Thank you so much for doing this with us! Before we dig in, our readers would like to get to know you a bit. Can you tell us a little about your backstory and how you grew up?
I grew up a Midwest boy and am still an ardent Green Bay Packers fan! Then thirty-six years ago, following a Jesuit education in high school, college and law school, I heard the siren song, packed up the family, and moved to Manhattan… I have been here ever since. A passion for reading and writing got me to law school where, to my surprise, I discovered tax law and all it its complexities. It fascinated me then…and still does.
Is there a particular book, film, or podcast that made a significant impact on you? Can you share a story or explain why it resonated with you so much?
That’s like asking what is your favorite restaurant in New York. Although one that does come to mind was reading Herman Hesse’s “Steppenwolf” when I was 19. I did not know there could be a novel without a linear plot. I actually had a similar experience when I first learned multivariate calculus. You could create three dimensional objects with it… a long way from my four-function calculator; who knew? Both opened me up to much more creative ways of thinking.
Is there a particular story that inspired you to pursue your particular career path? We’d love to hear it.
When I was growing up our next-door neighbor was a lawyer. My dad told me he made $50,000 a year… I thought… if only!
Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lesson you learned from that?
It was at what I look back at now as my first adult dinner party at my friend’s aunt in the West Village in NY. I was 16 and had traveled there with him. They gave us each a glass of white wine — a big deal for me — and then served the first course, which was a whole artichoke. I had no idea how to eat it but being too embarrassed to ask pulled off a couple of whole leaves, popped them into my mouth and with great difficulty began trying to chew them. Mercifully, the aunt noticed my dilemma and explained to me how to scrape off the petal meat with your teeth. I was mortified but learned a valuable lesson. If you don’t understand something, say so. There is no shame in asking.
None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?
Great question! My first boss in banking after law school, was an Austrian woman who had fled Europe to New York when the Nazis invaded her country. She was fairly senior in the bank and a real trailblazer in that era. She saw something in me, took me under her wing and taught me a lot about banking and finance. Although, what I really learned was to see things through the lens of her brilliant and extraordinarily detailed mind.
It was a revelation.
Are you working on any exciting new projects now? How do you think that will help people?
Yes, at Fieldpoint Private we recently decided to create our own trust company. We applied for and were granted a charter by the South Dakota Division of Banking and opened our doors at the beginning of this year. I was honored when our Board asked me to be its first President. A trust company can be a powerful tool to help families preserve and manage their wealth intergenerationally. The process begins with a carefully crafted estate plan which may contain any number of trusts. Any funded trust requires an active trustee, and that is where we come in. An experienced, mindful trustee can make an enormous positive difference in people’s lives.
Let’s now shift to the main focus of our interview. The cryptocurrency industry seems extremely dynamic right now. What are the 3 things in particular that most excite you about the industry? If you can, please share a story or example for each.
Given the markets of late, excitement is an understatement. With that said, three things that come to mind are:
The extraordinary volatility of this asset class. As of this writing, having seen spectacular gains in recent months it is in a freefall. As a proxy, the price of Bitcoin has fallen 30% in the last seven days. Its highwater mark was over $60,000. It is currently trading in the $20,000 range.
The idea that while crypto is not generally considered a fiat currency, which is to say, it is not legal tender created by a sovereign nation, it increasingly looks like it will eventually, if not sooner, come rather firmly under government fiat.
The various crypto currencies are products of the various blockchains which are created by non-governmental individuals and organizations. As a new asset class, they have, so far, been one step ahead of government regulators.
This will not last much longer. For example, in March of this year, President Biden signed an Executive Order directing the US federal government to come up with comprehensive laws and reporting standards to establish governance of it.
As an estate planning attorney, I see an asset with a range of valuation “choices” available as a function of its great volatility. As such, it gives access to a wide range of estate planning techniques depending on the price range. For example, when valuations are high, make gifts to charities using Charitable Remainder Trusts, or outright to Private Foundations, Donor Advised Funds, or the charity itself. Alternatively, when the value is low, but is expected to return to previous or even higher levels, make gifts out of the estate to irrevocable trust, GRATs, or, again, simply outright to family members.
What are the 3 things that concern you about the industry? Can you explain? What can be done to address those concerns?
There are so many nuances when it comes to advising our clients — things they need to understand from an income and estate tax planning perspective in order to successfully engage with digital assets — in particular cryptocurrency and NFTs.
So it’s not as much about what concerns me but more about what an investor or owner of Crypto should be aware of today.
A related concern is that there is very little guidance on these issues. That means no specific tax code sections, few if any IRS Letter Rulings or Technical advices, etc. And as importantly, scant case law (court decisions) on it.
There is only one relevant case that I am aware of. Important, however is IRS Notice 2014–21 which states that cryptocurrency is to be treated as property, not currency for Federal tax purposes. As such, the general tax principles that apply to property transactions must be applied to exchanges of cryptocurrencies as well. That means that the taxpayer must recognize gain or loss on the exchange of crypto for cash or other property. Accordingly, gain or loss is recognized every time cryptocurrency is sold or used to purchase goods or services. Be careful when you use Bitcoin to purchase that Tesla!
I will take some license with my third concern. It is that the rise of the blockchain has given life not only to digital currency but also to a wide range of other offspring including Non-Fungible Tokens (NFTs), Decentralized Autonomous Organizations (DAOs), Web 3.0, the Metaverse etc. Just as in the case of cryptocurrency itself, these still exist in a land that is largely off the regulatory and compliance grid.
The obvious way these concerns can be addressed is simply to wait for the sheriffs to get into town and restore some needed order.
What are the “myths” that you would like to dispel about cryptocurrency? Can you explain what you mean?
A big myth, or perhaps blind spot, as mentioned above is the belief that cryptocurrency is in many ways like a fiat currency — especially that it can be used to purchase and sell other assets with no tax consequences. Far be that from the truth. Back to the Tesla; if you purchased it with Bitcoin you have had from early days, you would not only have a shiny, new EV, but also a whopping taxable long-term capital gain!
Another is that it “somehow” is not subject to the wealth transfer regime. As underscored by the key characterization of it as property by the IRS, it most decidedly is. That is to say, gifts during life are subject to the Federal gift tax laws and transfers at death to Federal and State estate tax laws.
In some quarters there seems to be a sense, given the still developing state of reporting on the crypto exchanges (they won’t be required to issue 1099s until 2023), that you don’t have to keep close track of gains and losses on each transaction. Bad news: since 2020, taxpayers are required to “check a box” on their 1040 if they engaged in a crypto transaction other than a few administrative ones like holding virtual currency in a wallet or account, or transferring it from one wallet or account you own or control to another that you also own or control. So, Caveat Emptor!
This is more of a fine point, but some including the IRS seem to feel that the “mining” of digital currency creates taxable income. It is not yet definitive, but there is a case in a Federal District Court that could, and I believe will, establish that there is not a taxable event until mined currency is sold or used in a purchase transaction. After all, how is it any different than, say, mining for gold, or for that matter creating a painting?
Here is the main question of our interview. What are “The 5 Things You Need To Understand In Order To Successfully Invest In Cryptocurrency?” (Please share a story or example for each.)
Investors need to understand:
The basics of how the U.S. tax system treats this area, even given the fact that it is still in the early days.
In the world of wealth transfer, how downturns in value can be your friend.
Digital assets and blockchain-based digital formats other than crypto are a real thing too and not going away. I mentioned Non-Fungible Tokens (NFTs), Decentralized Autonomous Organizations (DAOs), Web 3.0, the Metaverse, etc.
Another good example of what to understand is a DAO. The short version: a DAO is a business entity somewhat analogous to a partnership (with a dollop of crowdfunding thrown in for good measure) but existing on a blockchain. An example might be an aggregation of independent musicians looking to circumvent Spotify. The taxation of it and/or its members has nightmarish aspects to it. Yet, they are now recognized legal entities in Wyoming and Vermont. So, again, help is on the way.
Don’t lose your private key! Take the time to understand what the needed safeguards are.
What are the most common mistakes you have seen people make when they enter the industry? What can be done to avoid that?
As mentioned above, a common mistake is misunderstanding most aspects of the taxation of digital currency (in fact digital assets in general).
As a subset of that, most tax mistakes that apply to non-crypto assets also apply to crypto. Another way of saying this is, even though there is not a lot of “guidance” in this area, tax professionals and taxpayers should, at all times, lean in on common sense and their general knowledge and experience around how tax law should operate; you will almost always be correct.
A big and growingly infamous one is that in the realm of crypto, if you keep your currency in a digital wallet (read MetaMask, Trezor, Coinbase) and loose the private key, you are out of luck big time. One of the classic stories is UK resident James Howell. He kept the private key to his digital wallet on his computer’s hard drive. When he replaced the drive, he unthinkingly threw out the original and realized only too late what he had done. In today’s dollars the wallet contained over $280 million of Bitcoin. As the tale goes, to this very day, the poor devil is sifting through the landfill site where he thinks it might reside.
You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be?
I believe education, which I would define as the enlightening of the mind, is the key to solving many of the world’s problems. I would love for universal education to be of the highest priority at a global level.
We are very blessed that very prominent leaders read this column. Is there a person in the world, or in the US with whom you would like to have a private breakfast or lunch, and why?
Elon Musk… the man is endlessly fascinating!
Thank you so much for these excellent stories and insights. We wish you continued success and good health!
About Fieldpoint Private
Headquartered in Greenwich, Connecticut, Fieldpoint Private (www.fieldpointprivate.com) has more than $1.6 billion in bank assets and provides personalized, custom private banking and wealth transfer services. Catering to successful individuals, families, entrepreneurs, businesses and institutions, Fieldpoint Private develops a comprehensive understanding of our clients’ individual financial circumstances and furnishes comprehensive advice and personal service to free up the one resource that regardless of means no one can ever have enough of: time.
Banking Services: Fieldpoint Private Bank & Trust. Member FDIC.
Registered Investment Advisors: Fieldpoint Private Securities, LLC, is a SEC Registered Investment Advisor and Broker Dealer. Member FINRA, MSRB, SIPC. Accounts managed by FPS are not FDIC insured.
Trust services offered through Fieldpoint Private Trust, LLC, a public trust company chartered in South Dakota by the South Dakota Division of Banking.