Maximizing your gains
The secret to make your way into the lower long-term capital gains tax bracket is to pay attention to your holding period and keep tabs on your taxable income.
Long-term capital gains grant you access to the 0%, 15%, and 20% tax rates. To qualify for these favorable tax rates, you must hold your Bitcoin investments over a year before selling them.
Then, pay attention to your income. A single filer can have taxable income up to $40,400 to claim the 0% tax bracket on long-term capital gains in 2021. Let’s say you are single with a taxable income of $25,000 in wages and $15,000 in long-term capital gains from Bitcoin. You would be eligible to pay zero taxes on your Bitcoin profits because your total income of $40,000 is less than the threshold for single filers.
Once you cross that income threshold, you get bumped up into the 15% long-term capital gains tax bracket. So in the above example, if you had $20,000 in long-term gains from Bitcoin, the first $15,400 would get the 0% rate, but the remaining $4,600 would get taxed at 15%.
Obviously, you don’t want to give up the chance to earn extra income just because some of it will get taxed. But if you have the option to choose when that income comes in, smart tax planning can save you some money.
