You’ve done it. You weighed the benefits and risks, did a little research, and invested in cryptocurrency. And your investment looks to be paying off hugely.
Maybe you were ambitious, invested early, and have been able to sit on your investment until its value has appreciated immensely. Or maybe you’ve largely been sitting on the crypto sidelines for years but then finally pulled the trigger and made an investment. Your timing happened to be exceptional, so you were able to buy low and then (in a very short matter of time) able to sell high.
Either way, you made an investment, and it’s treated you well. What happens next? Well, you have the IRS to deal with, mainly. Read on for an overview of the tax implications of major crypto gains, tips for minimizing the tax hit, and the unique opportunities presented by Qualified Opportunity Zones (or QOZs).
What You Need To Know About Taxes
Back in 2014, the IRS made it clear that cryptocurrency is considered property (as opposed to currency). That small distinction matters, since property is taxable and currency is not.
Basically, you’ll encounter tax implications whenever a “realization event” occurs. For example, if you acquire bitcoin through crypto mining, that value immediately becomes taxable—even if you never sell. The other main type of realization event happens when you either cash in on a crypto exchange or use your crypto to purchase goods or services. In these cases, any difference between the sale price (“realized value”) and what you spent to acquire the assets is taxable—assuming you are making a profit on the sale or exchange.
These are capital gains taxes, and there are different rules for short- and long-term capital gains taxes. Short-term capital gains tax would apply if you profit off of the sale of an asset you’ve held for a year or less; if you’ve held the asset for over a year, then long-term capital gains taxes would apply. Short-term gains are treated the same as ordinary income like wages or salaries. Based on your tax bracket, you may pay as little as 10% or as much as 37%. Long-term capital gains generally have lower tax rates—based on your income, you may pay either 0%, 15%, or 20%.
Like virtually any tax matter, the more you know about the rules, the better-positioned you’ll be to make savvy decisions that can trim your tax bill.
In many cases, it’s a good idea to hold (for at least one year from original purchase) until short-term gains become long-term gains, so you can take advantage of the lower tax rate. Or, you can continue to hold until you have a “low-income” year, potentially keeping you from crossing into a higher tax bracket. You can also offset your capital gains with capital losses, or reduce your taxable income through tax deductions and credits (like contributing to a retirement plan or health savings account).
You could also consider “gifting” some of your crypto to a family member. Per IRS guidelines, you can gift up to $15,000 in value (per year, per person) without incurring tax consequences. The same goes for donating cryptocurrency (with appreciated value) to charity.
There’s one more unique opportunity worth discussing: investing in a Qualified Opportunity Zone (QOZ).
One particularly intriguing way to spend and invest your crypto gains—and one more and more crypto investors are turning to—involves investing in real estate (specifically, Qualified Opportunity Zones).
What Is a Qualified Opportunity Zone?
The IRS defines a QOZ as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” QOZs are a relatively new thing, with the first set of designations being made in early 2018. The main purpose of designating and investing in QOZs is economic development and job creation in distressed communities. As such, they represent a unique vehicle for investing capital gains.
How Do I Defer Eligible Gains?
When you file your federal income tax return, you can elect to defer either whole or partial gains. More specifically, “you may make the election on the return on which the tax on that gain would be due if you do not defer it.” For a better understanding, you can refer to the IRS’s Form 8949 Instructions.
DWA is on Your Team
Investing crypto gains into real estate through the QOZ program represents an incredible opportunity to transform crypto gains into something tangible and real. This is an exciting program, and a unique opportunity—one we were only able to scratch the very surface of in this blog post.At Delta Wealth Advisors, we live and breathe this stuff. If you’re sitting on crypto gains, you’re sitting on a real opportunity. We’re ready to explore every angle of your financial picture and work with you to develop effective strategies to manage any and all assets at your disposal. Reach out today to learn more about the unique opportunities for growing your investments, today and beyond.