As investors mull over their year-end tax strategies, experts suggest that certain cryptocurrency investors may have a unique savings opportunity that is not widely known. In the aftermath of the cryptocurrency industry experiencing an almost $1.4 trillion loss in 2022, many investors turned to tax loss harvesting, a method that utilizes losses to counterbalance profits. However, following a resurgence in 2023, a different approach might be considered: strategically selling profitable cryptocurrencies held in brokerage accounts, a tactic commonly referred to as “tax gain harvesting.”
This particular strategy is most beneficial for investors positioned in the 0% long-term capital gains tax categorization who have held digital assets for more than a year, according to Wealthability CEO Tom Wheelwright. Wheelwright notes that as of Nov. 17, 2023, the price of Bitcoin has more than doubled since the beginning of 2023, resulting in some investors having accrued built-in gains. Those in the 0% bracket can sell their assets, recognize the gains and immediately repurchase them, as there is a no-wash sale rule applicable to gains.
The calculation of gains involves deducting the asset’s sales price from the original cost, known as the “basis.” However, when the currency is repurchased, the basis adjusts to the new purchase price, termed a “step-up in basis.” If prices continue to rise, subsequent sales will yield smaller profits due to the higher basis.
Wheelwright emphasizes the importance of recognizing tax-free opportunities to harvest crypto gains, advising investors to carefully consider their risk tolerance and financial goals before deciding to repurchase crypto.
The popularity of tax-loss harvesting in the crypto space is attributed to a wash sale loophole. Unlike losses for other assets, the IRS does not disallow crypto gains and losses for any asset within a 30-day window before or after the sale. Despite its popularity, tax-loss harvesting defers future tax, whereas the tax-gain strategy allows for selling at a gain without incurring immediate tax obligations.
The 0% long-term capital gains rate applies to taxable incomes of $89,250 or less for married couples filing together and $44,625 or less for individual filers. Taxable income is achieved by subtracting the larger standard or itemized deductions from adjusted gross earnings. For instance, if your 2023 salary is $55,000 and you contribute $5,000 pretax to a 401(k), your W-2 earnings become $50,000. With the $13,850 standard deduction for individual filers, your taxable income could fall below $44,625.
Looking ahead to 2024, the 0% brackets are even higher, with taxable income thresholds of $47,020 or less for individual filers and $94,045 or less for married couples filing together. Those engaged in crypto mining as clients of companies such as Stronghold Digital Mining Inc. (NASDAQ: SDIG) could explore how to benefit from the 0% tax rate this year and the years ahead.
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