Bitcoin Boom Got You Facing Tax Hit? Consider Opportunity Zone Investing

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Bitcoin has more than tripled in just the past year, and some say it could hit as much as $1 million each in coming years as big money keeps pouring into cryptocurrency.

There are multiple ways of investing in the digitally mined money, including exchanges, and those who bought bitcoin cheap — or any other cryptocurrency — and sold it for not-so-cheap in these days of soaring valuations may find themselves facing a humongous capital gains tax bill this year.

Now, there are lots of ways to spend and invest those gains, but how about considering using some of those gains from the newest of currencies to buy into some of our nation’s older real estate?

There are different ways of doing that, through 1031 exchanges, the Low Income Housing Tax Credit, and historic tax credits, for instance, but let’s talk here about one that’s getting a lot of attention lately: the Opportunity Zone (OZ) Program.

The double bottom line of OZ investing, amplified by crypto gains

Folks who invest capital gains in qualified opportunity funds (QOFs) not only enjoy significant deferments, leading up to complete forgiveness in some cases, but they’re engaging in the double bottom line of investing in that double bottom line of putting their money toward a community’s economic resurrection.

Crypto investors and others with windfalls from alternative assets are increasingly turning to opportunity zones to defer their gains, according to HCVT, a Top 30 accounting firm in Los Angeles.

Those who do can avoid a tax hit on those gains that could exceed 50%, at least in the case of a Californian with $1 million in taxable income used as an example by HCVT partner Blake Christian and Boston-based tax attorney Jay Darby III in a blog titled “A Bit (coin) of Luck: Cryptocurrency Tax Gains Find Enhanced Value in the Land of OZ.”

‘Frenetic trading’ leads some investors to whole new (and higher) tax brackets

Christian and Darby say: “The dramatic swings and stunning volatility of cryptocurrencies has led to frenetic trading by investors. This speculative crypto trading — as well as day-trading of stocks — has resulted in a substantial amount of short-term capital gains — generally taxed at a current 37% federal rate, plus the 3.8% Net Investment Income Tax (NIIT) — or 40.8%.”

Add an additional 13.3% in state levies for that California example, and you get that 54.1% combined tax rate.

That’s quite a stunner, especially for newer traders who may never have faced paying taxes on a gain like that and find themselves in an unfamiliar tax bracket, say Christian and Darby, both recently dubbed Top 25 OZ Influencers.

The ‘unprecedented possibility of unlimited tax-free upside in asset or business investment’

Here are three benefits that “a timely and successful QOF investment” can provide, courtesy of the HCVT blog:

  • Capital gains timely invested into a QOF are deferred until the later of: (i) the time that the amounts are withdrawn or otherwise triggered under the “inclusion event” rules or (ii) Dec. 31, 2026.
  • After holding the QOF interest for at least five years, the taxpayer’s basis in the QOF is increased by 10% of the original amount invested, and the reportable gain drops to 90% when recognized.
  • Taxpayers holding the QOF investment for at least 10 years can exclude 100% of the post-reinvestment appreciation in the QOF and in the underlying assets held by the QOF — including any eligible Qualified Opportunity Zone Business (QOZB) into which the QOF invests.

Darby and Christian add that the third item in this list “provides the unprecedented possibility of unlimited tax-free upside in asset or business investment.”

The Millionacres bottom line: The best of both new worlds

Cryptocurrency has gained favor because it offers impressive flexibility and an alternative investment strategy to bold, creative, and aggressive investors, Darby and Christian write, adding, “The Land of OZ may well be the next frontier for crypto investors and others generating short-term gains in the market and the ultimate tax tool for maximizing the after-tax economic return on those 2020 cryptocurrency gains.”

OZ investing takes patience and confidence, and much remains to be seen as the residential, commercial, and industrial opportunities play out in the more than 8,500 census-designated zones out there.

But for those who choose well, deferring those real gains from cryptocurrency trading can provide substantial benefits to both the investor and the underserved communities who see redevelopment and new growth because of that capital infusion.