As investors weigh year-end tax moves, there may be a lesser-known savings opportunity for certain cryptocurrency investors, experts say.
After the crypto industry lost nearly $1.4 trillion in 2022, many investors leveraged tax loss harvesting, which uses losses to offset profits. But after a rally in 2023, you may consider strategically selling profitable crypto held in brokerage accounts, known as “tax gain harvesting.”
The strategy works for investors in the 0% long-term capital gains bracket who have owned digital assets for more than one year, according to certified public accountant Tom Wheelwright, CEO of WealthAbility.
As of November 17, the price of bitcoin has more than doubled since the beginning of 2023, and some investors now have “built-in gains,” Wheelwright said.
Those in the 0% long-term capital gains bracket can “sell it, recognize the gain and buy it back immediately” because there’s no so-called wash sale rule for gains, he said.
You calculate gains by subtracting the asset’s sales price from the “basis” or original cost. But when you repurchase the currency, the basis adjusts to the new purchase price, known as a “step-up in basis.”
If prices continue to climb and you sell the asset again later, the higher basis means future profits will be smaller.
Investors “really ought to be paying attention” to tax-free opportunities to harvest crypto gains, according to Wheelwright. Of course, the decision to repurchase crypto depends on your risk tolerance and goals.
Why it’s a ‘wiser strategy’ to harvest gains
If you fall into the 0% bracket, crypto tax-gain harvesting is a “wiser strategy” than harvesting losses, especially when immediately buying back the asset, explained Andrew Gordon, tax attorney, CPA and president of Gordon Law Group.
Tax-loss harvesting has been popular among crypto investors because of a wash sale loophole. The IRS disallows a loss for other assets if investors buy a “substantially identical” asset within the 30-day window before or after the sale. The wash sale rule doesn’t apply to crypto losses or gains for any asset.
Still, the tax gain strategy allows you to sell at a gain and pay no tax, whereas “tax loss harvesting defers future tax,” Gordon said.
How to know your capital gains bracket
For 2023, you may fall into the 0% long-term capital gains rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly.
That’s based on “taxable income,” which is significantly lower than gross earnings. You calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
For example, if your 2023 salary is $60,000 and you make $5,000 in pre-tax 401(k) contributions, that brings your W-2 earnings to $55,000. Your taxable income could still fall below $44,625 after subtracting the $13,850 standard deduction for single filers.
The 0% long-term capital gains brackets are even higher for 2024, with taxable income of $47,025 or less for single filers and $94,050 or less for married couples filing jointly.