It’s crypto season, and some of you might be getting rich this year off meme coins. While I definitely don’t think you should throw thousands of dollars into PEPE coin, I also know that some of you will make 25X. If you are one of these people, please go read our article on investing for beginners for beginner tips and before you wreck yourself even more. 

I have been investing fairly heavily into crypto over the past couple of years. We’re talking about 40% of my portfolio worth right now is crypto. Now before you start judging me, I am young so I can handle the risk. A couple weeks ago, I was thinking about getting rich and retiring off crypto as most crypto moon-shot investors do. When I snapped back to reality and realized that isn’t happening (yet), I got to thinking about taxes on my earnings, which I hope to have quite a bit of during this crypto bull run. I got to thinking about uncle sam and how the government will want a piece of my earnings. How much will they want? Will this put me in a higher tax bracket? Will my wife be mad at me for putting us in a higher tax bracket because of my capital gains? 

All valid questions that need answering. I’m writing this blog for all investors out there who want to pay the least amount of taxes on their capital gains, whether you are invested in the stock market or crypto. 

Investors – join me on a journey to tax freedom.

How Do Capital Gains Get Taxed? 

Congratulations on building a large portfolio! Now let’s talk over taxes. Capital gains tax is a tax on the profit from the sale of an asset, such as stocks, bonds, real estate, or other investments such as crypto. Here’s a basic overview of what qualifies for a capital gains tax:

• Long-term capital gains: These are gains from assets held for more than one year. The tax rates for long-term capital gains are 0%, 15%, or 20%, depending on your taxable income. Lower-income taxpayers might qualify for a 0% rate, while higher-income taxpayers might pay 15% or 20%. Here is an income tax rate chart from the IRS breaking this down: 

• Short-term capital gains: These are gains from assets held for one year or less. Short-term capital gains are taxed at your ordinary income tax rate, which can be as high as 37% under current tax laws. Here is a chart breaking down how short-term gains are taxed:

• Qualified dividends: These are dividends paid by U.S. corporations or qualified foreign corporations. They are taxed at the same rates as long-term capital gains.

For the crypto-enthusiasts out there, the long-term and short-term income tax rates are basically the same for crypto trades. 

Now that you understand how your capital gains will get taxed, let’s go over some tips on how to minimize your taxes on your gains.

3 Ways to Minimize Taxes on Your Capital Gains

1. Hold Your Investment for Longer than 1 Year

The obvious thing to do is hold your investment for more than 1 year to take advantage of the long-term capital gains tax rate. A lot easier said than done, especially if your investments go crazy and give you a 25X, and if you earn a 6-figure income you need to be strategic about taking your investment out if you want to take advantage of the 0% rule. 

But holding onto your investments for more than a year can be a good idea for several reasons:

• Lower tax rates: Long-term capital gains are taxed at lower rates than short-term gains. By holding onto an investment for more than a year, you may qualify for these lower rates, which can save you money on taxes.
• Tax deferral: By holding onto your investments, you can defer paying taxes on any gains until you sell the investment. This can allow your investments to grow more quickly since you’re not paying taxes on the gains each year.
• Compounding: The longer you hold onto an investment, the more time it has to grow through compounding. Compounding allows your investment gains to generate their own gains, potentially leading to significant growth over time.
• Stability and long-term growth: Holding onto your investments for the long term can help you ride out market volatility and benefit from the overall growth of the market over time. Short-term fluctuations are less likely to have a significant impact on your overall returns when you have a long-term perspective.

2. Use Tax-Loss Harvesting

Tax-loss harvesting is a strategy used to offset capital gains by selling investments that have decreased in value. It can be a good idea for avoiding taxes on capital gains for several reasons:

• Offsetting gains: By selling investments that have decreased in value, you can offset capital gains realized from other investments. This can reduce or eliminate the taxes you would owe on those gains.
• Offsetting income: If your capital losses exceed your capital gains, you can use the excess losses to offset up to $3,000 of ordinary income per year. Any remaining losses can be carried forward to offset future gains and income.
• Resetting cost basis: By selling an investment at a loss and then buying it back, you can reset the cost basis of the investment to its current, lower value. This can reduce future capital gains taxes if the investment appreciates in value.
• Flexibility: Tax-loss harvesting can be done throughout the year, providing you with flexibility to manage your tax liabilities based on market conditions and your financial goals.

3. Donate Appreciated Assets to Charity

Donating your assets to charity can be a noble thing to do, and also a good idea for avoiding taxes on capital gains for a couple reasons:

• Elimination of capital gains tax: When you donate appreciated assets, such as stocks or mutual funds, to a qualified charity, you generally do not have to pay capital gains tax on the appreciation. This can result in significant tax savings compared to selling the assets and donating the cash.
• Charitable deduction: You can generally deduct the fair market value of the donated assets on your tax return, up to certain limits. This can help reduce your taxable income, potentially lowering your overall tax bill.
• Supporting a cause: You’re supporting a cause you care about, and at the same time realizing tax benefits.

Pro Tip: In a perfect world we would all be able to tax our capital gains at 0% and tell the government to leave us alone. In reality, you will most likely get taxed, especially if you household income is above 100K. It is a good idea to keep some funds from your investment winnings for tax purposes during tax season. It sucks I know, you should be able to keep and use 100% of your earnings, but the reality is without committing tax fraud, you will most likely be paying taxes. And, always remember it’s a good idea to consult with a tax professional to explore the best strategies for your specific situation.

To Sum Up

Optimizing your tax strategy can significantly impact your financial well-being. By understanding and leveraging tax-efficient strategies, you can minimize the taxes you pay and maximize your after-tax returns.

Holding onto investments for more than a year can lower your capital gains tax rate, while utilizing tax-advantaged accounts like IRAs or 401(k)s can defer or eliminate taxes on gains altogether. Tax-loss harvesting allows you to offset gains with losses, and donating appreciated assets to charity can eliminate capital gains taxes while providing a charitable deduction.

By incorporating these strategies into your financial plan, you can not only reduce your tax burden but also enhance your overall financial health and achieve your goals. Don’t let Uncle Sam get in the way of your goals. 

Remember, tax laws are complex and can change, so it’s always advisable to consult with a tax professional or financial advisor to develop a personalized tax strategy that suits your unique circumstances.

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