TAX STRATEGIES FOR YOUR 2021 RETURN
It is not too early to consider your tax strategies for 2021. I’ll discuss some of the issues you should be aware of regarding tax regulations in effect this year.
For 2021, even if you do not itemize your deductions, you will be able to reduce your taxable income if you make cash contributions to qualified charities. If you file a joint return, you will be able to deduct up to $600. In 2020, the maximum amount you could have deducted was $300 on a joint return. If you are single, or married and filing separately from your spouse, you can deduct $300.
In 2020, you were allowed to make “above the line” deductions. But on your 2021 tax return, your deduction will no longer be above the line. However, your deduction will result in a reduction in your taxable income. The IRS has indicated that the deduction should be specified on line 12-b on form 1040. You should maintain documentation for your cash contribution.
For those who are required to make required minimum distributions (RMDs), you will still be able to make qualified charitable deductions (QCDs) directly from your IRAs or other retirement plan. You can make up to $100,000 in direct charitable contributions from your retirement accounts; ask your retirement account custodian to make the contribution on your behalf from your retirement account. By making the QCD, you do not have to itemize to receive the tax benefit.
For example, if your marginal tax bracket is 22%, a $10,000 charitable deduction using a QCD would reduce your taxes by $2,200.
If any of your equity investments have decreased in value since you purchased them, you can consider selling them to offset any capital gains you will have to report on your 2021 tax return. No one likes to admit they made a bad investment decision, but selling equities at a loss — establishing a capital loss — can minimize your taxable income. For example, assume you sold some equities outside your retirement accounts for a long-term gain of $3,000. You also have a “paper loss” of $5,000 for an investment you made more than a year ago. If you establish the capital loss by selling the losing investment, you report a net capital gain loss of $2,000. If your net loss exceeds $3,000, you can carry forward the loss indefinitely on subsequent tax returns. The IRS allows you to deduct up to $3,000 in capital losses each subsequent year.
When you sell equities at a loss, and wish to buy them back immediately, you have to be aware of the “wash sale” regulations which apply to securities. The wash sale rule prohibits selling a security for a loss and replacing it with the same or a “substantially identical” investment 30 days before or after the sale.
According to some tax advisers, the regulations regarding wash sales do not apply to cryptocurrency transactions. These advisers tell cryptocurrency investors that they can sell their investments at a loss and immediately repurchase the same cryptocurrency investment, establishing a loss, and not be subject to the wash sale rule.
Other advisers hold a different opinion, so I ran the issue by Ric Edelman, who specializes in cryptocurrency issues. He responded as follows:
“Wash sale applies only to securities. Bitcoins are not securities, so wash sale rules do not apply to it. But other coins are securities, so the wash sale rule does apply to them. Also OTC trusts such as GBTC, BITW, and OBTC are securities and thus follow the rule. … The new tax bill has a provision that applies the wash sale rule to everything whether they are securities or not.”
The bottom line is that you should not assume that you can ignore the wash sale rule because you have invested in some form of cryptocurrency.