How To Minimize Your Taxes On Crypto Gains By Investing Qualified Opportunity Zones

How To Minimize Your Taxes On Crypto Gains By Investing Qualified Opportunity Zones

Opportunity Zones

  • Opportunity zones offer the most significant tax saving provisions in the history of the US tax code.
  • It became law under the TCJA of 2017.
  • It allows you to defer, reduce and sometimes eliminate capital gain taxes on property.

The Good News Is That Cryptocurrencies Are Treated As Property By The IRS [Notice 2014-21]

  • If you take advantage of the provisions available to you,  you can significantly reduce your crypto taxes.

OZ are geographic locations all over the US identified by the state and federal governments for economic development.  The TCJA of 2017 introduced OZ to encourage wealthy individuals to invest their unrealized capital gains in a tax-efficient manner in specific locations that are economically distressed. Wealthy individuals pool their money into Qualified Opportunity Funds (QOFs), which invest directly in OZ development projects.

Opportunity Zones (OZ) Explained

Reduce Your Crypto Taxes

  • X purchased 1,000 bitcoin (BTC) in 2013 for the average price of $100 per coin.
  • In 2020 one BTC is worth $7,000.
  • X now faces $6.9 million of long term capital gains ($7,000-$100)× 1,000).
  • If X decides to cash out, he will pay $1,642,200 in taxes.
  • This includes a 20% capital gain tax + a 3.8% net investment income tax.

Type Of Tax Relief

Those who sit on large amounts of unrealized cryptocurrency gains (as seen above) – and there is NO LIMIT – can use OZ to reduce their tax obligations. All that is required is that they invest their profits directly into a QOF within 180 days after selling their position.

The longevity of your investment in the QOF will determine your type of tax relief.

Tax Deferral

If X above were to invest his $6.9 million profit into a QOF, he could defer any tax payment on the same until December 31st, 2026, or when he sells his QOF position.  This way, his taxable obligation of $1,642,200 can work for him for much longer.

Tax Reduction

Investor X, if he held his investment in the QOF for five years, will save taxes to the amount of $164,220. After five years, 10% of the initial crypto tax gain ($690,000) will be tax-free ($690,000×23.8%).

Those who hold out for two more years can shelter another 5% of their initial crypto gain, which will increase their total tax savings to $246,330.

After year seven, investors will have to pay taxes on 85% of their initial crypto gain, after deferring their taxes for seven years and receiving a 15% tax discount, while it is likely that the FMV of the QOF increased substantially.

Tax Elimination

After ten years, investors in the QOF can avoid paying any capital gain tax on the appreciation of their stocks. This elimination of taxes on the appreciation of QOF stocks is the most significant opportunity provided in this tax provision.

Conclusion

Investment in a QOF is a very advanced tax planning strategy. It is most suited for sophisticated investors with a net worth of not less than $5,000,000.  For investors sitting on substantially appreciated crypto assets, OZ investment is one of the most excellent strategies to save a lot of money on taxes while diversifying your investment portfolio.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

Click to mail us and create the best tax plan for you Crypto Investment

Check The Video Version Tax Planning For Cryptocurrency U.S. Investors

Talk To An Expert

Testimonials

Gala Cedeño

Thanks to FAS & CPA Consultants and Fulton Abraham Sanchez, CPA, I was able to resolve a debt of $479,677.71 that I had with the IRS.

Carlos Lange

My experience with FAS CPA & Consultants has been incredible, their professionalism is impeccable. I highly recommend them.

David Barcelo

I highly recommend FAS CPA & Consultants, they are responsible, efficient and very dedicated.

FAS CPA & Consultants

9000 SW 137 AV Suite 224 Miami, FL 33186

T: 786-462-7899

E: support@fascpaconsultants.com

Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

You may also like...

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

error: Content is protected !!