CAKE WITH EDITH, TOO!! If You Own any Crypto and Missed this Tax Deduction in 2022, or 2023..
CONSIDER selling and buying right back NOW, in the middle of the new bull market. Here's Why:
UPDATE: EVEN THOUGH WE’RE IN A CRYPTO BULL NOW, IF YOU HAVE ANY POSITIONS THAT ARE BELOW WHEREVER YOU BOUGHT THEM, YOU CAN DO THIS NOW! Yep, check with your CPA for full blessings, but right now the IRS still does NOT apply the dreaded “WASH SALE RULES” to actual crypto (not funds of crypto). Yep, this means you can probably have your cake and eat it too!
Por exemplo: You have bitcoin you bought at the high a few years back and rode it down to 10k and now you’re excited about reaching 42,000!! Yeah, that’s a huge year to date gain, but all the IRS cares about is your cost basis of 60k, so theres a sweet 18,000 loss available for harvesting right now. ‘Well, I’d do it, but I have to wait 30 days to get back in or they’ll disallow the loss, right?”
WRONG!!! As of right now, this wash sale rule does NOT apply to crypto. You can sell, harvest that wonderful tax-reducing/offsetting loss, AND buy back two seconds later!!!!
“Well, only 3k of losses is any good to me because Rob told me”. Wrong again! After a complex little funnel of offsets, losses carry FORWARDS for tax use for the rest of your life (and perhaps even afterwards if you’re a Biden ghost voter:) Regardless, I don’t give advice here, only suggestions. Have your underperforming CPA explain it to you.
With that, let’s dive right in to the original post (by the way, all “sale” trades need to be done before the clock chimes midnight on New Year’s Eve
**First of all, NONE of this is investment or tax advice. Just information for you to consider and check out with your CPA or investment advisor**
Better day’s likely lie ahead, so here’s how you can
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“HAVE YOUR CAKE AND EAT IT TOO!” Read on and you’ll soon understand what I mean!
Yes, you should have done this before midnight on the last day of 2022, but now is your second best option. You’ll just have to wait until NEXT tax season (April 2024) to benefit from the tax deduction you lock in today (don’t worry if you’re between jobs or not currently in a taxable or high tax bracket, it will still carry forward every year for the rest of your life until you use it one way or the other)
Listen up, and read to the end:
Consider Selling Your Crypto Before the next potential crypto bull begins.
Many investors are familiar with the idea of tax-loss harvesting..
The short explanation is that you sell underwater positions to lock in the losses.
Ideally, you do this before the end of a given calendar year so you can use the losses when you file your taxes by the following April.
Since the Internal Revenue Service allows you to use your losses to offset investment gains on a dollar-for-dollar basis, this strategy can give you a nice tax break.
Better yet, you can use any excess losses — up to a $3,000 annual limit — to offset regular income.
And any unused losses can be carried forward for future tax years, too.
Some people will even sell underwater positions they want to continue holding for the long term just to get the tax benefit.
The only catch? The IRS has a wash sale rule that says you have to wait a full 30 calendar days before you can buy back the same (or even a “substantially identical”) security for the loss to count for tax purposes.
Now, here’s the cool thing: You’ll notice the word “security” was used.
Since cryptos are considered property and not securities, the wash sale rule doesn’t currently apply to them.
That means you can sell any crypto you own before Dec 31st of the tax year, lock in any paper losses you might currently have and then immediately buy back the same crypto without triggering the wash sale rule. (*note, this could change if congress somehow approves a “retroactive” tax amendment which applies for 2023. If you’re truly worried about this, consider waiting 31 days until buying back, IF it makes sense to you (you think the new bull will wait a while etc). That way you’re not dependent on the IRA current “oversight” in not making current wash rules apply to crypto. Also, if you do buy back immediately after selling, it’s not a violation if the law changes, You just won’t be able to apply the losses against your future gains to reduce taxes, so you’re out the transaction costs, that’s all. Seems worth it to me, but run it by your tax pro and make your own decision.)
For relatively minor transactional costs, you can get a huge tax break that can be used for 2022 and beyond without losing ownership of your investments for more than a little while.
Given the losses we’ve seen in the markets this year, taking advantage of this loophole right now is a no-brainer … especially since there’s no guarantee it will remain in place going forward. In fact, the Build Back Better Act recently tried to change this, but it was defeated in the Senate.
Besides, crypto could come roaring back in 2023, and this opportunity might not be a sensible option next year. So, strike now while the iron is hot.
This brings us to another incredibly smart tax move to consider making for the years ahead …
Do This and Never Pay Tax on Your Crypto Again
Harvesting losses using the current crypto wash sale loophole is a great way to turn lemons into lemonade.
But it can only go so far to lessen your future taxes.
That’s why you might want to take things a step further — by using a special account that completely avoids all taxation of your future crypto gains from here on out. Forever.
It starts with something most people have heard of — an Individual Retirement Account.
However, a traditional IRA only deferstaxes until a later date. That’s because the money you contribute hasn’t been taxed yet. It works the same way as your typical 401(k) plan.
Essentially, the IRS lets you put money into these accounts before taxes are levied. It also lets the money continue to rack up investment gains without requiring you to pay annual taxes on gains. Then, it taxes both the original contributions and any investment returns when the money comes back out of the accounts.
In short, traditional IRAs are a good deal but maybe not a great deal — especially if your primary goal is racking up spectacular gains and keeping as much money as possible.
Enter what we like to call “Delaware accounts.”
These accounts exist today because of important changes to the tax code back in 1997. The first of those changes was spearheaded by a senator from — you guessed it — Delaware.
His name was William V. Roth Jr., and he wanted to create a new type of IRA that could be funded with after-taxmoney, which would then grow tax-free from that point forward.
The idea ended up getting approved as part of the Taxpayer Relief Act of 1997. We now know these accounts as Roth IRAs.
Now, Roth IRAs have some distinct advantages over traditional IRAs.
For starters, because you contribute money that has already been taxed, your original investment — and all the future gains — will never be taxed again as long as you’re at least 59½ years old and the account has been held for a minimum of five years.
In addition, there are no required minimum distributions — an amount of money that must be withdrawn from most retirement accounts to satisfy federal tax laws — with Roth IRAs. In contrast, traditional IRAs require you to begin taking annual RMDs once you reach retirement age.
Previously, the retirement age was 70½. However, because of changes made as part of the Setting Every Community Up for Retirement Enhancement Act, it’s now age 72 for anyone whose 70th birthday is July 1, 2019, or later. And this threshold could change again in the future.
Also, if you withdraw your money from a Roth IRA before age 59½, you will only owe a 10% early withdrawal penalty and regular taxes on any gains. All the money taken out of a traditional IRA under that same circumstance is subject to the penalty and taxation.
In terms of similarities, both traditional IRAs and Roth IRAs can be funded until “Tax Day” of the following year. For example, you can make contributions for the 2022 tax year up until April 18, 2023.
They also have annual contribution limits. For 2022, that limit is $6,000 across all types of IRAs plus an extra $1,000 “catch-up” contribution for individuals 50 or older.
Now, Roth IRAs have some disadvantages. One of them is that Roth IRA contributions phase out once your modified adjusted gross income hits a certain level.
So, the higher your income gets, the less you can contribute to a Roth IRA. And once your income hits a certain amount, you won’t be able to contribute at all.
For 2022, the phaseouts start at $129,000 for single filers and $204,000 for joint filers.
Meanwhile, traditional IRAs have no income restriction for contributions. But the tax deductibility can be affected by your MAGI and whether you’re covered by a retirement plan at work.
If you’re worried about the contribution limits and/or the income caps, don’t be. Under the current laws, there’s a workaround available to all of us.
How to Fund a Roth IRA Through the “Backdoor”
Between the annual contribution limits and the income restrictions, you might think it’s hard to get a lot of money into a Roth IRA.
Well, that’s where the so-called “backdoor” strategy comes in.
This is when you convert a traditional IRA — or a 401(k) plan if your employer permits it — to a Roth IRA.
The IRS will currently allow you to do so regardless of how much money you make or how much money is in the account being converted.
The downside is you will have to pay tax on all the money being converted. This includes state tax on top of any federal tax owed.
The upside is your money will then grow tax-free in the Roth account going forward!
Given the fact that many traditional accounts — including stock and bond portfolios — have also suffered big losses this year, now is an especially good time to consider this move.
What’s more, Congress has expressed interest in trying to shut down this backdoor strategy, so there’s no guarantee it will remain possible in the future.
But while you can still get in on this opportunity, just consider what a difference this type of conversion could make going forward …
Let’s say you currently have $30,000 in an IRA, and it grows to $300,000 over the next 10 years ...
You then decide to use the money to help your grandchild purchase a first home.
Sounds great, right?
Here’s the caveat: The IRS treats all IRA distributions as regular income.
Under current law, that means you could end up handing Uncle Sam as much as 37% of your $300,000 — a staggering $111,000.
If you live in a place like California — where the top tax bracket is 13% — you could end up giving another $39,000 to the state as well.
In the end, you might only end up with half of your money!
But with a Roth IRA, the entire $300,000 would be available for your grandchild.
Obviously, there are a lot of nuances here. Some factors to consider include your income level right now and what it might be in the future, whether you will relocate to a different state at any point and even how much of the account you withdraw in a single year.
There’s also plenty of concern about the tax-free status of Roth IRAs changing at some point in the future. Tax rates themselves could change, too.
Regardless, the basic point remains: With a Roth IRA, you currently have the very best chance of keeping as much money as possible.
In fact, there have been some well-publicized cases of investors making insane amounts of money inside these accounts.
“Just consider Peter Thiel, a cofounder of PayPal (PYPL). He had a Roth IRA worth just $1,664 back in 1999, but more recently, that same account was valued at more than $5 billion!
Of course, he accomplished that astronomical appreciation by investing in pre-public shares of his own company. Then, he reinvested the proceeds into other private companies that also subsequently soared in value at crazy rates.”
This is not something that can be done in a regular Roth IRA.
Instead, you need a special type that gives you access to a wide range of alternative assets … including cryptos.
The Ultimate “Delaware Account” for Crypto Investors
IRAs typically reside at brokerage houses. So, they’re limited to the same type of investments as traditional IRAs, such as stocks, bonds, certificates of deposit, mutual funds, exchange-traded funds and other traditional assets.
Crypto investments — except for assets like crypto stocks or Grayscale’s trusts — are not allowed in these IRA accounts.
However, the same legislation that created Roth IRAs back in 1997 also created a lesser-known variant called the self-directed IRA.
In fact, less than 5% of all the assets held in IRAs are held in these special SDIRAs. That’s probably because many people don’t even know they exist!
These accounts have all the same features of the IRAs we just discussed. In fact, they even come in traditional and Roth versions with the associated advantages and disadvantages.
The difference is SDIRAs aren’t held at traditional brokerage houses. Instead, they’re administered by other IRS-approved institutions.
Using one of these third-party administrators allows you to invest in property — things like real estate, physical gold and even livestock. The only prohibited investments are collectibles (including gold coins), life insurance and stock in subchapter S corporations.
As we mentioned earlier, crypto is considered property by the IRS. That means crypto is fair game for SDIRAs, too!
You just need to find an approved company willing to handle the paperwork on your behalf.
Fortunately, there are quite a few reputable firms embracing the idea of crypto-focused SDIRAs to choose from.
What SDIRA Provider Is Right for You?
Finding the right SDIRA provider is a personal decision and will depend on what features are most important to you.
Here are two I’m familiar with. Both have excellent reputations and are worth considering and doing your own “due diligence” on (as you always should when making any decision with your hard earned money):
For example, if you want the ability to invest in more than 215 different cryptos, Alto IRA is a company worth looking into.
Alto’s CryptoIRA is directly integrated with Coinbase, which means you can buy and sell the same tokens available to Coinbase’s own users.
There are plenty of advantages to using this service, including no account minimums.
In addition, the only fee on the account is a 1% trade fee, which is actually lower than what you’d pay with a standard account straight from Coinbase. The only other possible fees are a $50 fee if you close your account and a $25 fee for outbound wire transfers.
As far as safety goes, Alto’s CryptoIRA offers a combination of hot and cold storage through Coinbase.
Assets are held on a 1:1 basis and are backed by more than $300 million in insurance. Also, cash balances are held in Federal Deposit Insurance Corporation-insured accounts.
What’s more, you can conveniently do your trading from a mobile app!
Add it all up and Alto’s CryptoIRA gives you all the advantages of a regular Coinbase account with lower fees and better tax advantages to boot.
And if you’re interested in investing in other assets — including private equity, real estate or startups to name a few — the company also has a separate Alto IRA SDIRA account for those as well.
One drawback? The company’s CryptoIRA service isn’t currently available to residents of Hawaii.
Use this link to check out ALTO or to learn more:
Click here to get started or learn more about Alto IRA info
For another provider with low fees, check out iTrust Capital.
This company offers the ability to trade 30 different cryptos as well as gold and silver. Also, there are no setup or monthly fees, and transactions only incur a 1% charge.
Additionally worth noting, iTrust currently allows users to stake Polkadot (DOT, Tech/Adoption Grade “B”) in their IRAs and earn up to 9.5% annual percentage yield.
Of course, given the uncertainty circling centralized exchanges right now, it’s understandable if you dislike the idea of entrusting any third-party firm to store your crypto … no matter how good their reputation is.
To check out ITrust click here Learn about ITrust Crypto Roth IRA
Use Today’s Ideas for a Powerful 1-2 Tax Punch
While it might be tempting to jump headfirst into these exciting opportunities, please keep in mind that this is just an overview of an incredibly complex topic.
Before you take any action, it would be advisable to speak with an accountant and/or other financial professional about your personal situation and financial goals to determine what exact strategy — or combination of strategies — makes the most sense for you from a tax and financial planning perspective.
There are also some unique ins and outs involved with SDIRAs, including rules that prohibit certain types of transactions between account owners and “disqualified persons.”
For example, if you own an apartment in an SDIRA, you can’t live in it or rent it out to an immediate family member. Breaking these rules can have serious — and immediate — tax consequences.
So, it pays to do further research ahead of time. You don’t want to find yourself in hot water with Uncle Sam.
However, there’s no denying the massive financial benefits involved here.
Even if you simply book some losses on your current crypto positions and then buy them right back, the tax savings could be substantial.
And if you take the next step and do your crypto investing in a tax shelter like a Roth SDIRA going forward…
There’s no telling how much extra money you could potentially keep in your pockets!
That’s why it is HIGHLY advisable to look into this further before crypto experiences its next big bull market run or lawmakers change your ability to take full advantage of everything we discussed today.
One important correction to the headline meme:
**NONE of this is investment or tax advice. Just information for you to consider and check out with your CPA or investment advisor**
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