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I made ~100k investing in Bitcoin. Afterwards, I learned that I needed to pay capital gains taxes on it in the amount of ~23k (according to Bitcoin and Crypto Taxes).

What are my options in terms of not paying so much gosh darn money?

Rodrigo de Azevedo
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Kevin Beal
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    Tip: if you make less money, you get to pay less tax! – Grade 'Eh' Bacon Oct 24 '17 at 18:24
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    Possible duplicate of How can I reduce my taxes for 2011 – Grade 'Eh' Bacon Oct 24 '17 at 18:25
  • Apart from the linked question, you may want to consider whether you have any capital losses available [ie: do you own shares etc. that have gone down in value], and look up 'tax loss harvesting'. This is all assuming you are in the US, which you didn't specify. – Grade 'Eh' Bacon Oct 24 '17 at 18:30
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    Donate it to charity? Contribute to retirement or medical savings accounts? Be content with the 77K in net profit? – D Stanley Oct 24 '17 at 18:35
  • When did you buy? When did you sell? When is or was the tax due? It's not clear to me whether these are taxes you should have paid last tax year or taxes you'll need to pay next year. Or something else. – Brythan Oct 24 '17 at 20:41
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    Some of the answers here discuss some strategies: https://money.stackexchange.com/questions/82006/what-is-it-called-when-you-sell-and-reinvest-to-pay-lower-taxes However, depending on how risky you believe Bitcoin is (read: very) you might consider taking the hit of 23k to avoid losing the other 77k. – BlackThorn Oct 24 '17 at 21:54
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    Please add a country tag as tax questions require one. – Chris W. Rea Oct 24 '17 at 22:23
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    More bad news: The 23k only represents federal taxes. You may owe more to your state and/or city. You should really talk to a tax professional. – josh3736 Oct 24 '17 at 22:26
  • You could owe much more then that in taxes. What you saw is federal capital gains tax and often times your city, county or state has extra tax tacked onto that. – Magisch Oct 26 '17 at 09:44

4 Answers4

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You need to meet a woman (or man if you are in a state that allows same sex marriage) who has a carried forward loss or other loss that exceeds the $3K/yr they can take against their own income. If they had a loss of $200K some time ago, and are taking $3K/yr, they may still have $100K they can offset with you. Marriages have been based on less than this.

JTP - Apologise to Monica
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    Joe, a tip of the hat to you. What a great answer! – Rocky Oct 24 '17 at 21:31
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    You know, I never considered losing a large pile of money as a strategy for attracting a rich spouse. Wonder what the best way to work that into a dating profile is... – HopelessN00b Oct 24 '17 at 22:35
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    "a state that allows same sex marriage": You're a little behind the times. That's all the (US) states, as of a couple years ago. There was this Supreme Court case... – Nate Eldredge Oct 25 '17 at 05:11
  • Yes, I know. Given the current government, I'm not behind, I just worded my answer in case the 2015 ruling is overturned. I'm sorry if that sarcasm didn't come through. – JTP - Apologise to Monica Oct 25 '17 at 10:05
  • Yeah, the sarcasm didn't come through at all. Dangers of a text medium! – Brian Oct 25 '17 at 14:57
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You can reduce your capital gains taxes in two ways (USA), off the top of my head:

  1. Sell something else at a loss to offset some of the gains
  2. Don't sell until you've held the asset for more than 1 year to qualify for the lower long-term capital gains rate.
Rocky
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Ditto Rocky.

Also:

  1. Break the sale up over several tax years so that you don't have a spike in your income pushing you into a higher tax bracket.

  2. Don't sell it until you retire, when you're probably in a lower tax bracket. (If you're 20, this may be impractical.)

  3. Get some other deductions, like medical expenses, charity, etc.

Failing that, maybe a couple of other ideas that neither of us thought of, I think the real answer is: suck it up and pay the taxes. If there was a way to reduce your taxes just by checking the right box on a tax form or some such, everybody would do it and the government wouldn't collect any taxes.

Jay
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    "everybody would do it and the government wouldn't collect any taxes." There's nothing wrong with having an impractical dream or two; don't judge. ;) – HopelessN00b Oct 24 '17 at 22:41
  • The suggestion to realise the capital gain over several years is a very helpful one that isn't immediately obvious to the investing novice (i.e. I didn't think of it until it was too late for me ;) ). – Kendall Lister Oct 25 '17 at 02:52
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    Note: Sometimes there are ways to reduce your taxes and the government expects people to take advantage of them. In that case, not taking advantage is actually paying more tax than you're supposed to. – user253751 Aug 05 '20 at 20:59
  • @user253751 Sure. What I was trying to say was, There are ways to arrange your finances to reduce your tax liability, but these usually have pros and cons. There is rarely if ever a "magic" solution where you can reduce your taxes just by checking the correct box on a form or doing something else that is totally painless. – Jay Aug 06 '20 at 14:15
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If you only have to pay 23k federal taxes on 100k, that means you are in the long term capital gains tax rate, which is the lower of the tax rates available.

First you get your federal income tax marginal tax rate, and then find the matching long term capital gains tax rate. For example, if your marginal federal income tax rate is 28%, your capital gains tax rate would be 15%. Or rather, if the amount of the gain would put you in the 28% rate, then your long term capital gains tax rate is 15%.

You can reduce that by having more losses. If you have anything else invested anywhere that is taking a loss, then you can sell that this year and it will offset the other gains you have realized. The only note is that your losses have to be long term capital losses too.

Tax loss harvesting takes this to an extreme where you sell something at a loss to lock in the tax loss, but you didn't really want to get rid of that investment, so then you buy a nearly identical investment. ie. if you owned shares of "Direxion Tech Sector ETF" and it was at a loss, you would sell that and then immediately buy "ProShares Tech Sector ETF", the competing product that does the exact same thing.

Then there is charity. This still requires spending money and you not having it any longer. If you feel that a cause can use the money more directly than the US government, you can donate an appreciated asset to the charity - not report a gain and also take a charitable deduction.

CQM
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