Capital Gains Help

[pb4uski]

...I have decided to sell and rebuy a portion of the crypto to generate $300k approx cap gains. That may also give some flexibility to the accountant choosing between first in first out or last in first out. ...

Won't you need to chose between FIFO or LIFO or SID before selling so the 1099-B issued to you by the brokerage reflects your chosen cost basis election? While what I found relates to stocks I would think it would equally relate to crypto.

Unfortunately, you cannot defer your decision on cost basis election for a stock sale until you file your tax return. Choosing a cost basis method is generally required before the trade settles, and waiting until tax time might lead to several disadvantages:

• Missed benefits: You might miss out on potential tax advantages by choosing a different cost basis method. Comparing the impact of different methods (e.g., FIFO, LIFO, specific identification) on your overall tax liability before settling the trade allows you to make an informed decision.
• Inaccurate reporting: Your brokerage firm is now required to report cost basis information to the IRS for transactions after certain dates. Delaying your decision might result in them reporting an incorrect basis if you haven't provided them with your choice on time.
• Penalties: In some cases, waiting until tax time to report a cost basis could lead to penalties from the IRS, especially if it results in inaccuracies on your return.

Therefore, it's crucial to make your cost basis election before the trade settles. Your brokerage firm should provide you with information on available options and resources to help you understand the implications of each method. You can also consult a tax professional for personalized advice.

 

[TheWizard]

Specific ID is the best method for dealing with taxable investments...

 

[pb4uski]

^^^ Agreed, but I don't think you can elect it after the trade... you have to elect it with the sale.

 

[SecondCor521]

^^^ Agreed, but I don't think you can elect it after the trade... you have to elect it with the sale.

Yup.

And I agree that the rules that apply to stock trades probably also apply to crypto trades - that seems to be how the IRS is treating them so far. But it's an area I'm not 100% familiar with.

OP probably just sold $300K of their oldest crypto (FIFO), and their accountant almost certainly can't choose differently. Live and learn, I guess.

 

[captain3d]

Good point I will check the FIFO status. I am not clear Re guards to crypto either. There is currently no wash sale rules for example.

 

[MichaelB]

The IRS defines crypto as property, so I would guess each unit has a specific acquisition cost.

I’m not a CPA or tax attorney. What really matters is how the brokerage determines and then reports the cost and subsequent gain.

 

[captain3d]

No 1099 yet for crypto

“ The IRS, via announcement 2023-2, deferred the requirement to report digital asset transactions on Form 1099-DA for the 2023 tax year. ”

It does seem like it is some what flexible right now.

“ Thankfully, the IRS accepts several methods for calculating the cost basis of investments subject to capital gains tax. It’s important to note that the amount you’ll pay in taxes can vary depending on which option you choose.

First in first out (FIFO): Digital assets bought first are the first assets sold
Highest in first out (HIFO): Your most expensive digital assets are sold first
Last in first out (LIFO): The assets you bought last are the first assets sold
Specific identification (Spec ID): You calculate the specific cost basis for each transaction”

 

[pb4uski]

Perhaps the rules are so undeveloped that you may have to the ability to select method on the fly. Not a space that I play in, but I know you can't do that for stocks.

 

[captain3d]

Ultimately I am trying my best to pay taxes so they should be more or less happy

 

[hotwired]

Thoughts

I did not read every single reply so forgive me if this is already been suggested. First figure out more or less what your tax burden will be both for doing it and two chunks and one. Keep in mind with short-term capital gains it's going to get taxed basically like a paycheck except no social security withholding. That's pretty brutal. So then take a peek and see if you can come up with a guesstimate as to how much the drawdown could be. You mentioned this investment has a history of whipsawing. If a very worst historical whipsaw is (for example) half of what you would pay in short-term capital gain tax, hold on until it becomes a year old then sell. (Side note: Now you mentioned doing this in two chunks, so you already taking that risk of drawing down with 50% of the value anyway.)

 

[RoBo]

At least

Hi All

My tax person is off for the holidays so it is over to you...

I am sitting on $600k, short term, unrealised capital gains that I think I will sell Q1 or Q2 next year.

I am thinking to sell half this week (and rebuy) to step up the basis and spread the tax burden over two years. I have no other income, losses or withdrawals.

Is this a good idea?

All opinions welcome.

Perhaps this is too late, but if you really have no other income why not take enough gain so that you have no tax- 14-21k depending on tax status

 

[captain3d]

Thanks Hotwired Yes that is more or less what I worked through and decided on the split.

Robo thanks for the tip.

At this point I have bought and sold enough to generate half ($300k) cap gains and maybe with some flexibility if the accountant wants to structure it FIFO or LIFO.

Now we wait and see how it works out.

 

[Crabbyjerry]

Same tax

More testing. According to this capital gains calculator (Inc California State Tax).
https://smartasset.com/investing/capital-gains-tax-calculator#61dBqMySCV


With no other income except capital gains. The tax bill (Married) is projected at:

.............LT in 1y......vs....ST Split 2y
100k.........$2,666.............$5,980
200k.......$24,302............$22,130
300k.......$50,498............$49,214
400k.......$78,598............$80,514
500k......$106,698..........$113,486
600k......$137,095..........$150,456


It surprised me how close they were especially around the $400k mark.
[/QUOTE are you mistaken that the long term tax is for a 100percent sale and short term is 50percect for two years. Wouldn’t the 400 sale be double

 

[copyright1997reloaded]

I would look at using SQQQ as a partial hedge (with its own set of risks) against the UPRO position, but would also be prepared to punt on it if they don't continue a reasonable correlation. UPRO and TQQQ have had a 90-94% correlation in the last couple years, but note that TQQQ has had a higher beta (so you would need to adjust downward the amount to short via SQQQ).

Having said this, I had a stock once that was bought out, mostly for cash (LLTC by ADI). I sold some prior to the deal completion to spread the LT Capital Gains over two years (and also saved a bit on NIIT).

 

[captain3d]

[/QUOTE are you mistaken that the long term tax is for a 100percent sale and short term is 50percect for two years. Wouldn’t the 400 sale be double[/QUOTE]

Yes it is double. Part of the issue is that CA tax does not have LT. Only as income.

 

[captain3d]

I would look at using SQQQ as a partial hedge (with its own set of risks) against the UPRO….

Ah yes another option thanks