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Despite recent dips, many longtime crypto investors could have significant gains. The price of bitcoin was still up about 49% year to date, while the price of ether has grown about 40%, as of midday on July 30.
If you are expecting a lower-income year for 2024, it could be a chance for tax-gain harvesting, or strategically selling profitable crypto while in the 0% long-term capital gains bracket. Long-term capital gains rates apply to assets owned for more than one year.
These rates apply to your “taxable income,” which you calculate by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
“Tax gain harvesting is one of the best strategies,” to spread earnings across multiple years, according to Andrew Gordon, a tax attorney, certified public accountant and president of Gordon Law Group.
Of course, you will need to weigh the tax consequences of boosting your adjusted gross income with crypto gains, which can affect other tax breaks.
Harvesting gains and then immediately repurchasing could also be a chance to reset your “basis,” or the original purchase price of an asset, to reduce future taxes, experts say.
The strategy could make sense even at the 15% long-term capital gains bracket if you are expecting higher income in the future and want to maintain your position, said Adam Markowitz, an enrolled agent at Luminary Tax Advisors in Windermere, Florida.
On top of capital gains, some investors also incur an extra 3.8% levy, which kicks in once modified adjusted gross income, or MAGI, exceeds $200,000 for single filers or $250,000 for married couples filing together.
If you are sitting on crypto losses, you could consider tax-loss harvesting, which allows you to offset other investing profits. Once losses exceed gains, you can use the excess to reduce regular income by up to $3,000 per year.
Although tax-loss harvesting often happens at year-end, it is better to harvest crypto losses over time because “those losses may no longer exist” by year-end, Gordon explained.
Typically, investors are subject to the wash sale rule, which blocks you from claiming the tax break if you repurchase a “substantially identical” asset within a 30-day window before or after the sale.
However, the wash-sale rule currently does not apply to cryptocurrency, meaning you could harvest losses and immediately repurchase to maintain your position.
The IRS gives us this loophole. We may as well take it.
Adam Markowitz
Enrolled agent at Luminary Tax Advisors
“The IRS gives us this loophole,” Markowitz said. “We may as well take it.”
While previous Congressional efforts to repeal the crypto wash sale rule have failed, changes could still happen.
Without action from Congress, trillions of tax breaks enacted by Trump will expire after 2025. The crypto wash sale rule could be revisited as lawmakers seek funding to extend key provisions, experts say.
“It may make sense to utilize it now before it goes away,” Gordon added.
