Cryptocurrency investors may be able to take advantage of a lesser-known tax savings opportunity at the end of the year, experts say.
Those with digital assets held in brokerage accounts and who have owned them for more than a year could qualify for 0%, 15%, or 20% long-term capital gains tax rates.
For 2023, single filers with taxable income of up to $44,625 and married couples filing jointly with up to $89,250 can pay 0% in long-term capital gains. In 2024, the brackets for 0% are even higher, with single filers having taxable income of $47,025 or less and married couples filing jointly having taxable income of $94,050 or less.
The tax gain strategy allows investors to sell assets at a gain and pay no tax, while tax loss harvesting only defers future tax.
Taxable income is lower than gross earnings and is calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
As an example, if you have a 2023 salary of $60,000 and make $5,000 in pre-tax 401(k) contributions, then your W-2 earnings would be $55,000. Your taxable income could still be below $44,625 after subtracting the $13,850 standard deduction for single filers.
The strategy works for those in the 0% long-term capital gains bracket. Investors can sell the asset, recognize the gain, and immediately buy it back as the wash sale rule for gains does not apply to cryptocurrency.
This repurchasing of the asset is known as a “step-up in basis” and allows for a higher basis, meaning future profits will be smaller should prices continue to climb.
When deciding whether to repurchase the asset, investors should consider their risk tolerance and goals.
Overall, tax gain harvesting can be a “wiser strategy” than tax loss harvesting, especially when immediately buying back the asset.