Now that we’re starting to see some life in the crypto markets over the past few months, it’s time to start getting proactive with tax planning in 2019. Bitcoin is still way down from all time highs, but none of have a crystal ball, so thinking about opportunities we have now will only put us ahead of the game. There are two main areas crypto investors should start exploring in 2019. First, tax-loss harvesting, just as many did last year. And second, turning those harvested assets into tax-free crypto assets.
Tax Loss-Harvesting
Whether you feel the crypto market will continue to grow through the rest of the year, you should be thinking about harvesting losses you still have available to harvest. First area to look at are those coins that may never recover or have very little chance of recovering. Some of these coins may have little or no market to trade on. Sell to a friend or someone in a chat group for almost nothing if possible. Next consideration should be the coins that are still in the short-term holding period. This is done by separating out your tax lots and specifically choosing which are still within a one year period and at a loss. Once you’ve locked in those losses, next consider growing those crypto assets tax-free.
Tax-Free Growth
After realizing your losses, use a Roth IRA to growth those assets tax-free. Some of you may be asking, what if I don’t qualify? Backdoor Roth IRA is available for anyone! A Backdoor Roth IRA gives you the ability to contribute to a nondeductible IRA and then convert those funds to a Self-directed Roth IRA immediately. There are no income limits on a nondeductible IRA, so anyone and their spouse can contribute the maximum annual limit. In 2019 the maximum contribution limits are $6,000 for individuals under the age of 50 and $7,000 for over age 50. Both you and your spouse combined can put away a total of $12,000 if under age 50 and $14,000 over age 50. Crypto can then be repurchased in a Self-directed Roth IRA. These assets then grow tax deferred and are tax-free upon withdrawal.
With implementing these two tax strategies you get your tax deduction today and tax-free benefit in the future. It’s a win-win situation. Reach out to me to book a time to discuss these tax planning areas.