29 Dec US Taxpayers who have held Bitcoin > 1 year: Just two days left to harvest tax gains.
For people in the US who have will have total income (including realized investment gains) below $52,400 (single with standard deduction, $104,800 for married couples) in 2020 it can be tax advantageous to sell profitable Bitcoin that you’ve held for >1 year and buy it back to trigger the taxes this year and bring you up to the threshold. (Also the case for some people with very high incomes, see below. But it is not applicable to students under 24 being supported by others, see comments)
I believe this may be more applicable this year than most due to people being un/under-employed due to the pandemic. … as well as the fact that everyone with Bitcoin held over 1 year should have plenty of gains right now.
Normally you want to postpone triggering gains to delay paying taxes, but if your income is low enough there is reason to do it eagerly:
The reason for this is that if your income, including gains is below $52,400 (single) your federal tax rate for capital assets held for >1 year is 0%. When you sell and rebuy the Bitcoin you increase your cost basis but won’t pay any tax on the portion that is under the threshold. If you go a little over, that isn’t a problem– you’ll only be taxed at the 15% rate on the amount you were over the limit.
To be clear this does not apply to assets held for exactly one year or less.
When you do this, you move the cost basis up on your Bitcoins and later when you sell them again you’ll have a smaller gain and pay less taxes (or a larger loss if the Bitcoin price falls, which can offset other gains– effectively teleporting your 0-tax space into future years).
The primary risk/disadvantages that I aware of is that you might make some mistake moving coins or dealing with an exchange, that you’ll pay trading fees and potentially the spread as well as market volatility risks, — also you do restart the 1 year clock, so if Bitcoin jumps to $500,000 per coin in January and you decide to sell some of it in February, you’d pay the higher short term gains rate. (Personally, I would be happy enough about the price that I wouldn’t worry too much about the higher tax rate… 🙂 ) If you otherwise had no Bitcoin sales this year, you’ll hurt your privacy by having to identify Bitcoin on your tax forms. Also, If you are receiving an ACA subsidy the additional “income” might also reduce it. I’m not well versed in the various subsidies people (esp. people with children) receive, so there may be additional considerations there.
If you sold assets at loss earlier in the year, e.g. from loss harvesting the huge stock market drop your net income may also be lower than you were assuming, so this might apply to you even if you had more income than the threshold.
I think the tax advantage is worth the trouble but your situation and preferences may be different. But don’t kill yourself trying to optimize taxes: It’s better to miss out on some tax optimization than it is to make some error that costs you money because you were in a hurry or felt time pressured to do something you didn’t fully understand.
Depending on where you live state income taxes may also apply. This calculator appears accurate.
A similar situation can apply to very high incomes. If your income this year is under $458,250 (single, married: $521,400, again assuming standard deduction) but you expect your income to be over that threshold during the next years, in other words if your long term gains will be taxed at the 20% (or 23.8%) rate in the future but you’re within the 15% rate now then you may be better off taking the gains now at the 15% rate. Though because of the alternative minimum tax, it’s harder to make blanket statements about people with incomes near $500k.
Similar can be done for short term losses– realizing them eagerly and before they turn long term in order to offset gains and reduce taxes, though I don’t expect too many people have Bitcoin losses right now. 🙂 Also the wash sale rule potentially creates complications for harvesting losses that require extra considerations.
The incoming Biden administration hasn’t delivered a sufficiently clear message on their intended tax policy, but I think it is unlikely that the capital gains rates will go down for anyone and it’s likely that they’ll go up at least for people with the highest income in 2022– so this might be a secondary reason to realize gains now.
Sadly for our UK friends, it appears that this practice may be expressly prohibited there.
Disclaimer: I’m not a CPA, but I’ve paid complicated taxes for a long time. 🙂