Crypto Tax Regulations United States

How Opportunity Zone Funds Can Reduce Your Tax Liability

Many crypto and blockchain investors have significant realized and unrealized capital gains in their portfolios, especially after the 2021 “bull” market. There are numerous tax strategies to manage capital gains including harvesting tax losses, funding retirement plans, charitable contributions, etc. In 2017, a new strategy arose when Congress enacted the Opportunity Zone (“OZ”) rules to encourage economic growth and investment in designated distressed low-income communities while providing capital gains tax benefits to investors. 

Although most OZ funds historically focused on traditional real estate, recently, some funds focused on crypto have launched new OZ funds.  Some appear to concentrate more on bitcoin mining, such as “Redivider Blockchain Opportunity Zone Fund.”  Conversely, others offer exposure to alternative crypto and Web 3 assets, such as “Blockchain OZ Fund.”

Operationally, taxpayers participate in an OZ by investing prior capital gains into a Qualified Opportunity Fund (“QOF” or “OZ Fund”) within certain deadlines. Generally, taxpayers have 180 days to invest a prior gain in an OZ Fund.  The period can be significantly longer for those realizing capital gains through partnerships (including DAOs), RICs, REITs, or certain other investment vehicles. 

The OZ rules provide two main tax incentives:

  1. First, an investor can potentially defer until December 31, 2026 any taxes due on any capital gains invested in an OZ Fund.* In effect, this is akin to receiving a tax-free loan from the government equal to taxes otherwise due, without having to pay interest or share in the profits earned on the loan.

*If a taxpayer makes an OZ investment by December 31, 2021 and holds the investment for at least 5 years, the deferred taxes are reduced by 10%. This is akin to getting paid by the government to make what may turn out to be a great investment.

  1. Second, an investor can potentially eliminate from gross income the post-acquisition appreciation on investments in an OZ Fund that are held for at least 10 years.  This benefit is the “juice of the fruit”, as it allows investors to realize 10 years of appreciation without any federal income tax on exit.

The OZ regime can potentially be very powerful given how capital gains are taxed. Generally, for individuals, short-term capital gains are taxed at the same rate as ordinary income. For high income taxpayers, that tax rate could be 37% for 2021 with an additional potential 3.8% tax called net investment income tax (NII) thereby bringing the total US federal income tax rate up to 40.8%. Long-term capital gains are generally taxed at a lower rate. For high-income taxpayers, the long-term capital gain tax rate can be 20% for 2021 increased to 23.8% if the taxpayer is subject to NII tax.  State and other local taxes could increase the rates.  (The tax rates on capital gains are different for corporations and certain other types of taxpayers other than individuals). Deferring capital gains taxes (in particular, short-term capital gains taxes) and eliminating taxes on the appreciation could result in significant added value to an investment.

Regardless of the value of tax benefits, any OZ investment must make sense from an economic standpoint. Most OZ Funds focused on “traditional” real estate (e.g., retail, offices, apartments, warehouses, etc.). However, there is an increasing trend to make OZ investments in actual operating businesses, including crypto as a subcategory of operating business. A quick survey reveals two types.  

One type seems to focus more on bitcoin mining. Some examples include Redivider Blockchain Opportunity Zone Fund.  The particulars of the OZ rules, however, will likely limit the degree to which investors will be able to enjoy tax-free appreciation in bitcoin. This is not the case for other OZ funds with exposure to crypto and other blockchain assets that have a more diversified approach. We will focus on Blockchain OZ Fund (BOZ) as an example. 

BOZ’s general thesis is that decentralized and distributed networks (that some refer to as “Web 3.0”) and their supporting assets will supplant many traditional ways of doing business, as those business functions can be performed by smart contracts. Below are examples of business functions currently performed by traditional companies and the Web 3.0, decentralized and distributed networks that could take market share from such traditional companies:*

FunctionTraditional BusinessesD&D Alternatives
File storageAWS, AkamaiFilecoin, Storj
Video transcodingAWS,, FastlyVideocoin, Livepeer, Theta
Delivery / NetworkAkamai, Verizon, ComcastChia
ProcessingBank of America, JPMorganEthereum, Securitize, Fantom
Content management / ownership trackingSpotify, NetflixNon-Fungible & Fungible Tokens
PaymentsPayPalBitcoin, USDC, USDT, XRP
Internet servicesVerizon, AT&T, ComcastHelium
Search engineGoogleThe Graph
Securities trading / settlementGoldman Sachs, Morgan Stanley, DTCCLoopring, Hyperledger

*Many other categories can be found here:

The net impact of OZ funds, such as BOZ, is that investors can benefit from a decade of tax-free growth of the next generation of blockchain technology without having to pay tax on that appreciation as long as they hold the investment for 10 years. In effect, it’s like a Roth IRA without the income or age restrictions.

On top of the potential investment benefits, Web 3 (blockchain-related) OZ investments provide tangible social benefits by providing needed economic development and technology jobs in areas that need them most. 

Contact Norm Hannawa from Blockchain OZ Fund at for more information.

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