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High Net Worth: Tax Optimizer Case Study

Ted is a 42-year-old lawyer who owns his own law firm and invested in crypto back in 2017. On March 1, 2017 he made the following purchases: 

  •  60 BTC for $73,350
  • 400 ETH for $6,948

In early 2018, Ted decides to follow John McCafee’s advice – that privacy coins were the future, so he decides to buy a position in Zcash (ZEC). Ted decides not to increase his crypto investments, but to first sell half of both his BTC and ETH in exchange for Zcash. 

On January 8, 2018, when BTC trades at  $16,538,  ETH at $1,267, and  ZEC at $1,069, Ted makes the following trades: 

  •   30 BTC in exchange for 464 ZEC
  • 200 ETH in exchange for 237 ZEC

Till November 2021, Ted has been HODLing onto all his coins, as he believes in long-term investments over occasional trades. 

This is Ted’s portfolio in November 2021

Due to the high demand for his crypto legal services, he now wants to expand his law practice and needs $400,000 of capital. He decides against a bank loan or distributions from his law firm and opts to liquidate some of his crypto in order to fund his investment. 

Since Ted’s BTC gains are significantly higher than his ETH and ZEC gains, on November 4, 2021, he decides to sell 6.5 BTC to fund his law firm’s expansion. As BTC is trading at $61,600, he gets $400,400 out of the sale. 

Ted runs his tax reports and notices that his long-term gains are $392,454. 

In addition to his $392,454 gains, Ted also has the following income:

  • W-2 Wages of $120,000
  • S-Corporation Business Income of $180,000

Ted has no other income, and his wife (who he files a joint return with) doesn’t work. All of his other investments are in retirement accounts, which makes them tax-free. As you can see on Ted’s tax summary below, his taxes total $138,237.

But what if Ted had used the Accointing Tax Optimizer?

Since Ted had purchased his ZEC with BTC and ETH, he had no idea of what his tax basis or unrealized loss in ZEC was. But after using Accointing’s Tax Optimizer, he realized he could use his ZEC losses to get a reduction in taxes.

As initially decided, he plans to sell on November 4, 2021 with BTC trading at $61,600 and ZEC at $163. Upon seeing this loss, he decides to sell:

  • 100% (701) of his ZEC for $114,263
  • 4.65 BTC for $286,440

Ted now has $400,703 in cash, which is sufficient for his business expansion. How does this affect his taxes?

Ted has now saved $89,027 in taxes! Although his losses far exceeded $3,000, which is the maximum he could deduct on his tax return against his other income, he can carry forward those $270,867 of losses into future years. This means that his initial $270,867 of capital gains will be tax-free!

Now Ted also qualifies to take the Qualified Business Income deduction on his S-Corporation business income; even though this is a Specified Trade or Business, his adjusted gross income is under the $329,800 §199A(e)(2) threshold.

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