This article was originally published on Forbes by Shehan Chandrasekera on December 27, 2019
The end of December is a great time to look into tax saving strategies that will save thousands of dollars when you file for 2019 taxes next year. This post will explain 4 simple tax saving strategies that any crypto holder can execute with a simple click of a button and save thousands of dollars in taxes. Although these are highly effective and quick to implement at year end, they can also be implemented throughout the year to optimize your tax situation.
Sell Long-Term Crypto First
Selling cryptocurrencies you have held for more than 12 months may result in absolutely zero taxes in some cases because long-term capital gains are taxed at preferential rates. Your long-term capital gain tax rate depends on your income level and filing status. If you fall within 10% or 12% ordinary tax bracket, your net capital gains may not be subject to any taxes. If you are in higher tax brackets (22%, 24%, 32%, 35% & 37%) you will either be subject to a 15% (most common) or a 20% flat rate, irrespective of the size of your long-term capital gain. In addition to capital gain tax rates, you may also be subject to an additonal 3.8% Net Investment Income Tax at certain income level.
Overall, the total tax you pay on long-term capital gains will be much lower compared to ordinary tax rates applicable to short-term capital gains (short-term capital gains are taxed as ordinary income). Therefore, selling long-term crypto first is a great tax saving strategy for anybody irrespective of their filing status or income levels.
Harvest Tax Losses
Tax loss harvesting is a great tool to generate tax losses (not real losses) which will reduce your taxable income. Although this strategy is not only limited to crypto assets, crypto assets provide an unique advantage that traditional stocks and securities can not offer.
According to the IRS Notice 2014-21, cryptocurrencies are treated as property and all general rules applicable to property should be applied to cryptocurrencies. One key rule which discourages tax loss harvesting for stocks is wash sales. This is governed by section 1091 of the IRS code. Luckily, section 1091 wash sales rule is only applicable to “stocks & securities”, not for property. This leaves a big loophole which is very advantageous for crypto investors.
Assume Jennet purchased 1 BTC on June 1st, 2019 for $12,000. On December 27th 2019, FMV of the BTC is $7,000. Jennet can sell the BTC on December 27th for $7,000 and generate a short-term capital loss of $5,000 ($12,000 - $7,000). This will directly reduce her taxable income by $5,000. She can also quickly buy back another BTC at $7,000 (or lower) to maintain her position and sell when it goes above $12,000. If Jennet performs this transaction on a stock, the $5,000 loss will be not allowed for tax purposes under wash sales rules. In the crypto world, she gets to claim a tax loss and maintain the same or better position. If you use a reputed crypto tax software tool, with a click of a button, you can harvest your losses.
Offset Stock Gains With Crypto Losses
This is a timely tax planning strategy as Dow sets a all time high for 2019. Most of you would want to cash out your stocks at these prices. If you sell your position before December 31, 2019, resulting gains will be taxed as capital gains on your 2019 tax return. Luckily, these gains can be offset with your crypto losses.
For example, let’s say Sam purchased 1 BTC on July 1st 2019 for $11,000. On May 1st 2019 he also purchased 25 units of Tesla (TSLA) stocks for $200 each. By the year end, BTC has gone down to $7,000 and TSLA has reached an all time high of $400 per unit. When Sam sells his position on TSLA, that would generate a short-term capital gain of $5,000 (($400 - $200) x 25). Assuming he is subject to a 25% average ordinary tax rate, taxes on this $5,000 gain will be $1,250 ($5,000 x 25%). Here is the kicker. If Sam sells his BTC, that would generate a short-term capital loss of $4,000 ($11,000 - $7,000). Cryptocurrencies are treated as property so those gains & losses can be offset with regular stock transactions. In this scenario, $4,000 crypto loss can be used to offset $5,000 capital gain arising from TSLA. This would reduce his taxes from $1,250 to $250 ($1,000 x 25%). Both stock and crypto gains and losses will end up on Schedule D. Make sure to follow proper netting procedures on Schedule D.
Donations are a great way to support the community while saving tax money. With a click of a button, you can easily donate your crypto assets to various charities. If you itemize, you will get a deduction for these donations on Schedule A of Form 1040. The amount of deduction depends on the holding period of the crypto asset. If you donate an asset which you held for more than a year, the deduction is the fair market value (FMV) at the time of the donation. If you donate an asset which you held for less than a year, the deduction is the lesser of FMV or cost basis. Crypto donations are allowed by the IRS and the guidance around this subject is pretty clear (A34).
These are some of the extremely easy to implement tax planning strategies before the end of 2019 year. These can be implemented alone or together. Actual tax savings will vary based on your specific case. If you miss these during 2019, you can periodically implement these during 2020.
Disclaimer: this post is informational only and is not meant as tax advice. For tax advice please speak with a tax professional.