Maximizing Tax Savings: The Rise of Crypto Tax-Gain Harvesting

Experts reveal a lesser-known savings opportunity for cryptocurrency investors

As the year draws to a close, investors are considering their year-end tax moves, and experts are highlighting a lesser-known savings opportunity for certain cryptocurrency investors. After the crypto industry suffered significant losses in 2022, many investors turned to tax loss harvesting to offset their profits. However, with the recent rally in 2023, there is now a chance to strategically sell profitable crypto held in brokerage accounts, known as “tax gain harvesting.” This strategy is particularly beneficial for investors in the 0% long-term capital gains bracket who have held their digital assets for more than one year.

Understanding Tax Gain Harvesting

According to certified public accountant Tom Wheelwright, CEO of WealthAbility, investors in the 0% long-term capital gains bracket can sell their profitable crypto and immediately repurchase it without being subject to the wash sale rule for gains. The gains are calculated by subtracting the asset’s sales price from the original cost, known as the “basis.” When repurchasing the currency, the basis adjusts to the new purchase price, resulting in a “step-up in basis.” This higher basis can lead to smaller future profits if prices continue to rise.

The Benefits of Tax Gain Harvesting

For investors in the 0% bracket, tax-gain harvesting is considered a wiser strategy than harvesting losses, especially when the asset is immediately repurchased. Unlike tax loss harvesting, which only defers future tax, tax gain harvesting allows investors to sell at a gain and pay no tax. This strategy can be particularly advantageous for those who have seen significant appreciation in the value of their crypto assets.

Capitalizing on Tax-Free Opportunities

Andrew Gordon, tax attorney, CPA, and president of Gordon Law Group, emphasizes the importance of paying attention to tax-free opportunities to harvest crypto gains. While tax loss harvesting has been popular among crypto investors due to a wash sale loophole, the tax gain strategy offers immediate tax savings. By selling profitable crypto and repurchasing it, investors can reset their basis and potentially reduce future tax liabilities.

Determining Your Capital Gains Bracket

To determine if you fall into the 0% long-term capital gains rate, you need to consider your taxable income for 2023. For single filers, a taxable income of $44,625 or less qualifies for the 0% bracket, while for married couples filing jointly, the threshold is $89,250 or less. It’s important to note that taxable income is calculated by subtracting deductions from adjusted gross income, which is significantly lower than gross earnings.

Conclusion:

As the crypto market continues to experience significant volatility, investors are exploring various strategies to maximize their tax savings. Tax gain harvesting offers a unique opportunity for investors in the 0% long-term capital gains bracket to sell profitable crypto and immediately repurchase it, resetting the basis and potentially reducing future tax liabilities. However, each investor should carefully consider their risk tolerance and long-term goals before implementing this strategy. By taking advantage of tax-free opportunities, investors can navigate the complex world of cryptocurrency taxation and optimize their financial outcomes.


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