In a single business day recently, I received a string of nearly identical inquiries. Each came from a cryptocurrency investor who had watched a confident, polished video and arrived convinced that a particular trust, a Wyoming LLC, or some stack of the two, would let them hold and sell digital assets without ever paying tax.
The pitch is persuasive. It uses real code sections and real legal terms. It is also wrong.
The people who act on these pitches often end up far worse off than if they had simply paid the tax they owed in the first place. That is especially true for crypto investors, where large unrealized gains, online marketing, self-custody, privacy concerns, and distrust of traditional institutions all make “secret loophole” claims unusually appealing.
This article explains what these structures actually do, what the law actually says, and what can happen to taxpayers who try the version currently making the rounds online.
The Short Answer
No, a trust does not make cryptocurrency tax free.
No, a Wyoming LLC does not make cryptocurrency tax free.
No, calling a trust “Section 643 compliant” does not make capital gains disappear.
A legitimate estate plan can help protect cryptocurrency, avoid probate, authorize fiduciary access, preserve privacy, and coordinate tax planning. But a trust or LLC cannot simply erase the income tax on crypto gains. For more on proper digital asset planning, see my article on crypto inheritance and digital asset estate planning and my earlier article on how to pass cryptocurrency as inheritance.
Where the Myth Comes From
The most common version I am hearing cites Section 643 of the Internal Revenue Code. It is sold under a long and deliberately impressive name: the “non-grantor, irrevocable, complex, discretionary, spendthrift trust.” The marketing materials often describe it as “643 compliant.” Some promoters even market the trust form as copyrighted, as if that had anything to do with how it is taxed.
The promise usually goes like this:
You move your appreciated cryptocurrency into the trust, often by selling it to the trust in exchange for a promissory note. The trust sells the coins. The gain is allocated to the trust’s principal, relabeled as an “extraordinary dividend,” and under Section 643 it supposedly escapes income tax. Meanwhile, you keep practical control by serving as a “compliance overseer,” with the power to hire and fire the trustee and change the beneficiaries. You are not named as a beneficiary, but your spouse and children usually are.
It sounds credible because every piece of it borrows a real word from trust law. There is a real Section 643. There are real concepts called distributable net income and extraordinary dividends. There are legitimate irrevocable trusts. There are also legitimate asset protection and estate tax planning trusts.
That is the hook. The pitch mixes real concepts with a conclusion that does not follow.
The IRS has specifically identified abusive Section 643 trusts as schemes that misread the statute, misuse the concept of distributable net income, and improperly omit capital gains or extraordinary dividends from taxable income.
What Section 643 Actually Does
Section 643 does not make trust income tax free.
Section 643 deals with the calculation of distributable net income, commonly called DNI. DNI is the mechanism that helps determine who pays tax on trust income: the trust itself or a beneficiary who received a distribution.
That is very different from saying the income is not taxed at all.
On August 9, 2023, the IRS Office of Chief Counsel issued Memorandum AM 2023-006 addressing this exact marketed trust structure. The memorandum explains that the promotional materials mistakenly interpret Section 643 as removing certain trust income from current taxation. The IRS rejected that interpretation.
When a trustee allocates capital gains or extraordinary dividends to principal under Section 643(a)(3) or Section 643(a)(4), those items may be removed from DNI. They are not removed from the trust’s gross income or taxable income.
That distinction is the whole case.
Under Section 641, a non-grantor trust still pays income tax on its taxable income. Allocating capital gain to corpus and making no distributions does not erase the tax. It simply keeps the income inside the trust and leaves the trust to pay the tax.
That can be a very bad result, because trust income tax brackets are highly compressed. For 2026, estates and trusts reach the 37 percent federal bracket once taxable income exceeds $16,000.
So the strategy does not merely fail to eliminate the tax. It may put the income in a worse tax environment.
The “Extraordinary Dividend” Label Does Not Change the Tax Result
One of the most common claims in these materials is that trust income can be relabeled as an extraordinary dividend, allocated to corpus, and excluded from taxation.
That is not how the statute works.
A trust accounting label is not a magic tax exemption. Moving an item from income to principal may matter for fiduciary accounting and for deciding what can or must be distributed to beneficiaries. It does not transform taxable gain into non-taxable gain.
The IRS’s abusive trust guidance states the point directly: trusts must recognize income on capital gains and dividends except to the extent those amounts are distributed or deemed distributed to beneficiaries.
In plain English, the tax lands somewhere. It does not vanish.
Retained Control Creates Another Problem
The marketed trust structure often creates a second problem for itself.
Its whole appeal is that you supposedly keep control. You may be called a compliance overseer. You may have the power to remove and replace the trustee. You may be able to change beneficiaries. You may be told that because you are not technically a beneficiary, the trust is outside your estate and outside your income tax return.
That is a dangerous oversimplification.
If the retained control is too substantial, the IRS may argue that the trust is a grantor trust, meaning the income belongs on your personal tax return. In more aggressive cases, the IRS may argue that the trust is a sham and should be disregarded entirely.
AM 2023-006 was limited to rebutting the Section 643 income tax claim. The IRS expressly noted that it was not deciding several other issues, including whether the arrangement could be treated as a grantor trust, whether transfers to or from the trust were taxable gifts, whether the trust had the claimed asset protection benefits, whether the trust might be disregarded under sham trust principles, or whether the transaction could be a reportable transaction.
That matters. The IRS did not say, “Everything else about this works.” It said, in effect, “The Section 643 argument fails, and we are not even addressing the other problems yet.”
Why This Is Not Legitimate Asset Protection Planning
There are legitimate irrevocable trusts. There are legitimate spendthrift trusts. There are legitimate asset protection strategies. There are also legitimate estate tax planning tools for high-net-worth families.
But legitimate planning involves real tradeoffs. You give up some control. You accept administrative complexity. You coordinate income tax, estate tax, gift tax, basis, creditor, and family considerations. You do not get a copyrighted form from an online promoter and declare appreciated crypto tax free.
That is why the word “trust” can be so misleading. I discussed this more generally in The Problem With the Word Trust and How Irrevocable Is an Irrevocable Trust?. A trust is not one thing. Different trusts do different jobs.
A revocable living trust can be excellent for probate avoidance and administration. An irrevocable trust can be useful for transfer tax planning or asset protection in the right circumstances. But neither one makes taxable cryptocurrency gains disappear.
The Wyoming LLC Version
A related pitch swaps the trust for a Wyoming LLC.
The idea is simple: form an LLC in Wyoming, hold your crypto inside it, and avoid tax because Wyoming has no state income tax.
That claim also fails.
An LLC is usually a pass-through entity. A single-member LLC is generally disregarded for federal income tax purposes. A multi-member LLC is generally taxed as a partnership unless it elects otherwise. Either way, the income generally flows through to the owners and lands on their personal returns.
Wyoming’s lack of a state income tax may benefit Wyoming residents. It does not make income tax free for an Illinois resident.
An Illinois resident who owns a Wyoming LLC still reports income in Illinois. The Illinois Department of Revenue states that if you were an Illinois resident when you received income, you are taxed on 100 percent of that income, regardless of source.
Forming an LLC in Wyoming does not change your residency. It does not change your domicile. It does not erase federal income tax. It does not make crypto gains disappear.
What Really Happens If You Try It
The structure does not make the tax obligation vanish. It usually delays the moment when the bill comes due, then makes that bill larger.
If the IRS examines the arrangement, it may recharacterize the trust, disregard the entity, or tax the income to the person who really controlled the property. The taxpayer may owe back taxes and interest. The IRS accuracy-related penalty is generally 20 percent of the portion of the underpayment attributable to negligence, disregard of rules, or substantial understatement.
If the conduct is found to be fraudulent, the civil fraud penalty can reach 75 percent of the underpayment attributable to fraud.
The Department of Justice has also pursued abusive trust promoters. In 2026, for example, DOJ announced guilty verdicts against promoters of a nationwide abusive trust tax shelter that allegedly helped clients evade federal income taxes.
There is also a practical trap worth naming. Promoters are themselves targets. When a promoter comes under investigation, the customer list is often one of the first things investigators want. The person who sold the structure is not necessarily going to protect the taxpayer when their own exposure becomes the priority.
Crypto Is Not as Invisible as Promoters Suggest
Many crypto investors are drawn to these structures because they believe self-custody or private wallets make their activity invisible.
That assumption is increasingly dangerous.
Public blockchains are transparent. Exchanges, brokers, and payment processors are subject to expanding reporting rules. The IRS has emphasized that income from digital assets is taxable and that taxpayers may need to report transactions involving cryptocurrency and NFTs on their returns.
Broker reporting is also expanding through Form 1099-DA, which is used to report digital asset proceeds from broker transactions. The IRS has stated that brokers must report gross proceeds, and in some cases basis, from sales or dispositions of digital assets to both the taxpayer and the IRS.
The better assumption is that crypto activity is visible or will become visible.
Why These Pitches Appeal So Strongly to Crypto Investors
I understand why these pitches land.
A long-term cryptocurrency holder may be sitting on a very large unrealized gain. The tax owed on exit can feel enormous and sudden, almost like a penalty for having been right.
The culture around digital assets also prizes decentralization and tends to distrust banks, government, and traditional institutions. That makes a story about a loophole the system does not want you to know feel plausible rather than suspicious.
The audience also skews online, and the same algorithms that surface trading tips can surface tax schemes. Gains that arrived quickly can feel like found money. Handing back a quarter or a third of those gains can feel painful enough to make a promise of “zero tax” unusually seductive.
None of that changes the law.
What Actually Works for Crypto Estate Planning
Real planning exists. For many crypto investors, it is worth doing.
It just does not produce a tax-free result.
A properly drafted revocable living trust can keep digital assets out of probate and give a successor trustee a lawful, workable path to wallets, keys, exchange accounts, and related records. That is especially important because digital assets can be permanently lost if no one knows they exist or no one has authority and practical access to manage them. For more on that point, see Planning for Online and Digital Assets and Avoid a Crypto Disaster.
For clients with estates exceeding transfer tax thresholds, irrevocable trust planning may be worth discussing. An intentionally defective grantor trust or other advanced structure may move future appreciation outside the taxable estate. But those strategies involve real tradeoffs, including loss of control, possible loss of basis step-up, gift tax considerations, trustee selection, reporting obligations, and administrative cost.
For charitably inclined clients, charitable planning may also be useful. A charitable remainder trust can sometimes defer gain, create an income stream, and benefit a charity. That is not the same as making tax disappear. It is a structured charitable strategy with rules, tradeoffs, and a real charitable component. I discuss charitable planning more generally on my Charitable Planning page.
Timing can also matter. Loss harvesting, installment planning, charitable giving, and coordination with other income can sometimes reduce or manage the tax burden. These are planning tools, not magic words.
For Illinois residents, state estate tax planning may also matter. Illinois has its own estate tax system, and married couples often need thoughtful trust structuring because Illinois does not have the same portability system that exists under federal estate tax law. For more, see my page on Illinois estate tax planning and my article on whether a husband and wife should have separate trusts.
The Difference Between Planning and a Scheme
The difference between legitimate planning and an abusive scheme is usually not subtle.
Legitimate planning sounds like this:
“We can manage the tax consequences, but there are tradeoffs.”
A scheme sounds like this:
“You can sell appreciated crypto and pay no tax.”
Legitimate planning tells you who gives up control, who reports income, what the tax return will show, what happens if the IRS asks questions, and what the strategy costs.
A scheme tells you that the IRS does not want you to know about it.
Legitimate planning works with your CPA, financial advisor, trustee, and attorney.
A scheme often asks you to rely on a promoter’s private interpretation of the tax code.
When a strategy is described as a secret used by the wealthy, but the IRS has publicly identified the same type of arrangement as abusive, that should end the conversation.
FAQ
Can a trust make cryptocurrency tax free?
No. A trust may help with estate planning, probate avoidance, fiduciary access, privacy, and long-term administration. It does not make taxable cryptocurrency gains disappear.
What is a Section 643 trust?
The marketed version usually refers to a so-called non-grantor, irrevocable, complex, discretionary, spendthrift trust. Promoters claim that Section 643 allows capital gains or extraordinary dividends to be removed from taxation. The IRS has rejected that interpretation.
Does Section 643 eliminate capital gains tax?
No. Section 643 helps calculate distributable net income. It does not remove capital gains from gross income or taxable income.
Does a Wyoming LLC avoid crypto taxes?
No. A Wyoming LLC does not erase federal tax, and it does not prevent an Illinois resident from owing Illinois income tax. Illinois residents are generally taxed on income received while they are residents, regardless of source.
Is cryptocurrency taxable?
Yes. The IRS states that income from digital assets is taxable and that taxpayers may need to report digital asset transactions on their tax returns.
What is the right way to plan for cryptocurrency?
The right approach is usually a coordinated estate and tax plan. That may include a revocable trust, fiduciary access language, secure key instructions, beneficiary coordination, charitable planning, estate tax planning, and careful income tax advice from a qualified CPA or tax attorney.
The Bottom Line
If a structure promises that you can hold and sell cryptocurrency and owe no tax, treat that promise as a warning sign rather than an opportunity.
A trust can be useful. An LLC can be useful. Wyoming law can be useful in the right setting. But none of those things makes cryptocurrency tax free.
Before you sign anything, form an entity, transfer digital assets, or move a single coin, talk to a licensed attorney and a qualified tax advisor who will tell you what the structure really does, including the parts the video left out.
At the Law Offices of Robert J. Varak, I help clients in Naperville and throughout Illinois plan for cryptocurrency, digital assets, trusts, estate tax exposure, and family administration issues in a way that is practical, lawful, and built to withstand scrutiny.
This article is general information and not legal or tax advice for any particular person. Tax outcomes depend on your specific facts and on current law, which can change. Please consult a qualified attorney and tax advisor before acting.