Taxes

Alternatives to tax-loss harvesting

In this article, we outline the strategies you should use to minimize your tax liability if you have unrealized gains and no tax-loss harvesting opportunities.

Morgan Chrystal

@MchrystalCPA

Morgan Chrystal is a certified public accountant at Ursula Serluca, CPA, a small public accounting practice located in Purchase, NY that primarily serves small – medium sized businesses and individuals. Previously, she worked as a tax consultant in the private equity sector at Deloitte. Morgan holds a master’s degree in accounting from New York University and a dual Bachelor’s degree in finance and computer science from Iona College. She recently passed the CFP exam and is working towards earning the full credential. Morgan is passionate about personal finance and helping to make accounting and finance matters less daunting for her clients!

As part of a collaboration with 3CryptoCpas, we’ve put together a two-part piece on alternatives to tax-loss harvesting.

For those of you with lots of unrealized gains and no more tax-loss harvestable opportunities, here are a few strategies you can employ to optimize your tax liability.

1. Donate crypto that currently has large unrealized gains

You can donate some portion of your current crypto holdings that have increased in value to a qualified charity. A key qualification here is that you are expected to donate the crypto-assets directly to the charity, rather than liquidating and donating the cash.

By donating you would avoid capital gains completely while generating a material tax deduction. How? Well, your deduction will be calculated based on the fair market value of your crypto assets at the time of donation.

2. Qualified Opportunity Zones

Qualified Opportunity Zones (QOZs) were written into law as part of The Tax Cuts and Jobs Act. This initiative sponsored and pushed forward by the Trump administration is meant to incentivize financing for underdeveloped areas around the United States.

Areas that have been declared as QOZs offer incredibly attractive tax benefits. You can invest in a QOZ fund with proceeds from a crypto sale within the past 180 days. If you hold your investment for 10 years, you will not be required to pay any taxes on the gain you recognized when selling the asset or any profits recognized over the life of the fund. Wow!

Consult your CPA or wealth manager for additional guidance for contributing to QOZs.

3. Passing down a stepped-up cost basis to your heirs

This is a little dark, but it is worth mentioning.

If you pass away while holding tokens that have appreciated, then whoever inherits those tokens will recognize a new basis at the fair market value of the tokens at the time of your death. This means that it is incredibly important for token holders to make plans for the transfer of crypto assets in the case of an unexpected death. This could be a set of instructions in a safe or even a digital lockbox.

Let’s break down the calculation a little further.

Let’s say you bought Token X for $5, making that your cost basis, and it increased in value to $100. If you were to sell it, you would have to recognize a $95 gain. However, if you were to pass away and Token X is inherited by your estate, the estate will recognize their basis in the Token at $100, the fair market value at the time of death.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult your tax professional. If you're looking to work with an accountant and need help finding someone, leave your information here, and we'll connect you.

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