Cryptocurrency and Opportunity Zones: What You Should Know

Cryptocurrencies, like BitCoin, Ethereum, and Binance Coin, have been exploding in popularity in recent years, both in use for everyday transactions as well as opportunities for investment. Even though crypto markets often encourage high-frequency trading, many investors have nonetheless found themselves making impressive fortunes on crypto assets.

Those gains, however, can be subject to a federal tax rate of up to 40%. What’s more, if investors live in a state like California, those crypto gains can face up to an additional 13% in state levies for high income. Understandably, smart cryptocurrency investors are looking for strategies to reduce their overall tax liability on their crypto earnings. 

Opportunity Zones are a Legal Way to Lower Your Crypto Tax LiabilitY

Investing your crypto earnings into Opportunity Zone Funds (OZFs) is one such strategy for paying less in taxes. OZFs provide financial support for development projects in Opportunity Zones (OZs). OZs are communities specifically designated for development and awarded special tax incentives in order to foster investment. These tax incentives can be a great way to keep more of your crypto earnings in your pocket over the long run.

First, though, let’s take a closer look at how crypto earnings are currently being taxed.

How Cryptocurrency Earning are Taxed

Many people believe investing or using cryptocurrency is essentially an anonymous and untraceable way to avoid paying taxes. This is a myth, however.

According to the federal government, cryptocurrency is considered “property” and is treated as a capital asset for income tax purposes. This means that taxes on your crypto investments are similar to those you would owe for realizing a gain or loss on the sale or exchange of any other capital asset.

To figure out how much you would owe for crypto taxes, however, you’ll need to do more than just compare your net proceeds to your cost basis for when you bought and sold your crypto. You’ll also need to consider how long you’ve had the asset, as the length of time can affect the type of capital gain or loss you’ll see

This is because . . .

• Short-term gains and losses are subject to the same tax rates you pay on ordinary income, such as wages, salaries, commissions, etc.
• Long-term gains and losses typically cost you less in taxes as they involve lower tax rates than short-term gains and losses.

How Qualified Opportunity Zones Offer Crypto Tax Advantages

Qualified Opportunity Zones (QOZs) provide crypto investors with two core tax benefits.

The first is tax deferral. Typically, investors are required to pay capital gains taxes in the year those gains are realized. However, if an investor puts their crypto earnings into a QOZ Fund within 180 days of their realization, then they are allowed to defer paying taxes on those gains until December 31, 2026. Tax deferral means you have more money in play working for you as well as the potential to face a lower tax liability down the road when it’s time to pay.

The second core tax benefit that QOZs provide is tax elimination. If an investor holds his or her interest in a QOZ Fund for at least 10 years, any appreciation realized from the sale of the either the QOZ investment or the investor’s interest in the QOZ fund is not subject to tax

While 10 years may seem like a considerable waiting period, especially from investors coming the fast-paced world of high-frequency crypto trading, the tax savings from QOZ Fund tax elimination can be significant.

Turning Crypto into Revitalized Communities

Savvy crypto investors are starting to pay more and more attention to Opportunity Zones, and for very good reasons. The tax benefits that QOZ Funds offer, whether that be a tax deferral or a tax elimination, are smart moves for reducing the onerous taxes levied against crypto earnings. Additionally, you can feel good knowing that not only are you using available tax advantages to your advantage, you’re also leveraging your crypto earnings to develop communities that frequently get disregarded by traditional financial institutions.

If you’re interested in learning more about the tax advantages that Opportunity Zones make available to cryptocurrency investors, please contact us today.  

 *Important Notice: OZ FundHub is not a licensed tax, accounting, or financial firm. All Information contained is for educational purposes only.*