2 Strategies to Reduce Taxes from the Sale of Your Business

Recently, one of my colleagues took me aside and asked what I could do to help a 40-year-old client who sold his business last year for $40 million. He wanted to shelter the proceeds from capital gains taxes and possibly fund a trust for his family. We both already knew that the opportunity to reduce the tax recognition on the capital gain had long passed.

Had he sought our advice long before he was committed to the sale of this business, we could have explored some valuable options. Here are two of them.

The Qualified Small Business Stock Exclusion

One option our client may have considered is to investigate qualifying his business for Small Business Stock treatment under Section 1202 of the Internal Revenue Code (IRC). Section 1202 was added through the 1993 Revenue Reconciliation Act to encourage small business investment. A Qualified Small Business (QSB) is any active domestic C corporation engaged in certain business activities whose assets have a fair market value of not more than $50 million on or immediately after the original issuance of stock, regardless of any subsequent appreciation (IRC § 1202 (d)(1)).

Qualified Small Business Stock that is issued after Aug. 10, 1993, and held for at least five years before it is sold may be partially or wholly exempt from federal capital gains taxes on the value of the shares sold, up to the greater of $10 million in eligible gain or 10 times the aggregate cost basis in the shares sold in each tax year (IRC § 1202 (b)(1)). Be aware that this limitation applies to each separate shareholder, and a trust, or multiple trusts, established and funded with QSB Stock gifted by a qualified QSB shareholder may enable much more than $10 million in gain exclusion. For QSB shares acquired after Sept. 27, 2010, the capital gain exclusion percentage is 100%, and it is excluded from alternative minimum taxes and the net investment income tax with the same five-year holding requirement (IRC § 1202 (a)(4)).

But only certain types of companies fall under the category of a QSB. To be a QSB, the domestic corporation must engage in a “Qualified Trade or Business” (QTB). Such a business will generally manufacture or sell products, as opposed to providing services and expertise. Businesses that generally will not qualify are those offering services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking and insurance, as well as hospitality businesses such as hotels and restaurants (IRC § 1202 (e)(3)).

To qualify and continue as a QSB, the business must follow certain rules (there are many, and these are the most basic): It must be a domestic C corporation when the stock is issued and when sold, and at least 80% of its assets must be used in the active conduct of one or more QTBs during substantially the entire five-year holding period. If the business is already an LLC or S corporation, it may still qualify if the business reorganizes and revokes the subchapter S election and issues new stock in the C corporation, then meets the holding period before selling.

It is critical that management of the company understands all of IRC Section 1202’s requirements and agrees to maintain the business in a manner that continues to satisfy the active business requirement and the asset investment limitations, and avoid the pitfalls related to stock redemptions, tax elections and conversions.

To summarize, in order for the QSB shareholder to claim the tax benefits upon sale, the following must apply: The shareholder may be a person or business not organized as a C-Corp; the QSB stock must be original issue and not purchased in trade for other stock; the shareholder must hold the QSB stock for at least five years; and the QSB issuing the stock must devote more than 80% of its assets toward the operation or one or more QTBs.

The Tennessee Income Tax Non-Grantor Trust Strategy

Most states conform to the QSB stock exclusion and also exclude capital gains tax on QSB stock when sold as required in IRC § 1202. The exceptions are California, Mississippi, Alabama, Pennsylvania, New Jersey, Puerto Rico, Hawaii and Massachusetts. If you live in one of those states, you may want to consider a concurrent trust strategy described below to eliminate all capital gains taxes on the sale of QSB stock. But even in conforming states, the QSB shareholder can claim additional exclusions greater than the $10 million exclusion limitation by gifting into multiple trusts so all the possible gain from the sale is excluded.

Shareholders living in a nonconforming state or expecting an aggregate capital gain much greater than the $10 million cap may use a Tennessee Income Non-Grantor Trust (TING) to eliminate all federal and state taxation on the sale of the QSB stock gifted to the TING prior to an agreement to sell. Tennessee law enables a person who owns a highly appreciated asset, like QSB stock, to reduce or eliminate his resident state capital gains taxes on the sale of the QSB stock through a TING. While several other states also have laws that support this strategy, Tennessee legislators have adopted the best parts of other states’ laws. To be clear, a taxpayer already living in a state with no state income tax may use resident state trusts to spread the capital gain resulting from the sale of QSB Stock.

The grantor will gift the QSB stock to one or more TINGs (a gift of QSB stock is an exception to the original issue rule under IRC § 1202 (h)(2) and the five-year holding period is not interrupted by a gift to a trust under IRC § 1202 (h)(1)). The trustee may then sell the QSB stock in a manner that allows treatment as a long-term capital gain. If the TING makes no distributions in the tax year in which the QSB stock meeting all the requirements is sold, the sale will be excluded from federal and state capital gain recognition.

The Sourced Income Rule Affecting Trust Taxation

The client’s resident state may seek to tax at least some of the income of a nonresident TING if the client’s resident state has a close interest in the trust’s assets, such as through real property located in or a business operating in that state. This is known as the Sourced Income Rule. Some states think they have a sufficient connection to levy a tax on a nonresident trust simply because the settlor or a beneficiary of the trust lives in that state, or the trustee has an office in that state. That broad application of the definition of a resident trust may be misplaced, but many of our clients want to avoid any expense from litigating against a state taxing authority.

However, if the tax savings are substantial, then a client considering a TING should be aware that the Supreme Court has unanimously ruled that the state of North Carolina overstepped its taxing authority when it sought to tax trust income based solely on the residence of a trust beneficiary. North Carolina argued that its taxing authority included any trust income that “is for the benefit of” a state resident. The Supreme Court disagreed and ruled in the case of North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust “that the presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.” This ruling may serve to restrain other state taxing authorities from applying an overly broad application of their resident trust rule.

Both of these strategies used together can be highly beneficial for a QSB shareholder living in a QSB nonconforming state or one who expects the total capital gain from a sale to exceed the $10 million cap on a QSB capital gain exclusion. However, these strategies also require that the QSB management and the QSB shareholder plan many years ahead of any contemplated sale.

Senior Vice President, Argent Trust Company

Timothy Barrett is a senior vice president and trust counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, 2016 Bingham Fellow, a board member of the Metro Louisville Estate Planning Council, and is a member of the Louisville, Kentucky and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Program Planning Committee.

Source: kiplinger.com

Effective Tax Strategies for the Present and Future

Did you get a surprise when you filed your taxes this year? It’s common for taxpayers to be caught off guard – either owing more than anticipated or receiving an unexpected refund. Though most taxpayers are relieved once taxes are filed, many have little understanding about how to manage their tax situation to enhance their savings and investment strategies.

Many find the process of managing taxes too daunting and simply react to taxes resulting from savings and investment decisions, rather than implementing strategies to minimize their taxes beforehand.

 In 2020, many investors overreacted during the pandemic and, fearing market volatility would erase investment gains, sold appreciated investments, subjecting them to increased taxes. Others sold assets in 2021 and incurred taxes because they suspected a proposed tax increase would push capital gains rates from 20% into tax rates of 37% or more, though ultimately there wasn’t political support to pass such tax increases.  

To avoid these types of reactive, knee-jerk approaches to decisions, you need a comprehensive tax strategy in place. Once equipped with appropriate strategies – such as those outlined below – taxpayers can adapt their savings and investment decisions and consider taxes as part of the equation.

Savings and Income Tax Advantages

Planning for taxes is meaningful because they influence other overarching financial decisions, including what we purchase, where we live and work, and when and where we can retire comfortably.  Managing taxes effectively requires looking at short-and long-term factors, primarily around savings and spending, investments and legacy planning.  Often taxes can be lowered depending how much is saved and what savings vehicles are used.  Current income tax rates affect our ability or willingness to save – especially in light of incentives offered by qualified retirement plans. For instance, investing in a 401(k) or an IRA can reduce current taxes and provide tax-deferred investment growth until assets are distributed.  Alternatively, a Roth IRA or a Roth 401(k), may result in greater current tax payments but permit tax-free growth and tax-free distributions when funded with after-tax dollars. 

Choosing between those alternatives requires looking at the overall situation.  An investor in the 24% income tax bracket, for example, who contributes $10,000 to a pre-tax 401(k) plan can save $2,400 in federal taxes, lowering the net overall investment “cost.” A designated Roth 401(k) or Roth IRA, assuming savings at the same $10,000 level, would not provide any current income tax break, but would allow the account owner to later take withdrawals tax-free, provided other parameters are met (e.g., five-year account period and/or meeting other restrictions).

Individuals should compare taxes saved through savings deferral at their current tax rate with those rates likely to apply once tax-deferred assets are to be withdrawn. For example, a married couple or individual with a marginal 24% tax rate who expect to be subject to much higher taxes in retirement (current highest marginal tax rates are 37%), caused by income from a pension or from other sources, may want to pay taxes on income now, and invest the after-tax dollars to produce tax-free distributions later to avoid paying taxes at higher rates.  Alternatively, those expecting income to level off or be reduced once they withdraw funds may be better off with a tax-deferred 401(k) allowing them to retain current income.

Naturally, the situation can change over time, so tax-saving strategies should be revised as circumstances change.

Managing Taxable Investment Accounts

Effectively managed brokerage accounts and other non-qualified, taxable accounts may incorporate a prudent tax-loss harvesting strategy coordinated by investment and tax advisers.  Long-term investors can take advantage of lower capital gains taxes from tax loss harvesting when selling investments to cover current expense and withdrawal needs and particularly when buying and selling investments as part of their long-term investment rebalancing to maintain a desired asset allocation and to keep their portfolio diversified.  

Investment rebalancing usually involves selling appreciated assets and purchasing others at more attractive prices to meet their investment objectives. In the process, selling appreciated assets can increase capital gains taxes. As appreciated assets are sold, investors can find opportunities to also consider selling other investments currently valued at less than their purchase cost, which can be due to temporary market volatility or other reasons related to the individual holding(s).  Selling assets at a loss enables investors to capture a tax benefit.  In effect, it allows them to offset any capital gains incurred from selling the appreciated assets.

Consider, for example, an investor who purchases individual publicly traded stocks. For simplicity, let’s assume 100 shares of a stock were purchased over one year ago at $200 per share (total acquisition price of $20,000) and are sold at a price of $150 per share, (total sales price of $15,000). Ignoring any cost of the sale, it generates a $5,000 long-term capital loss (long-term only when the position was sold after a one-year holding period) which can be used to offset other current year taxable capital gains when other investments are sold at market prices greater than their cost. In situations where total annual losses from all sales exceed gains – e.g., there are not sufficient gains to completely offset total losses – up to $3,000 of such loss can be used to offset ordinary income in the current year. To the extent losses exceed $3,000, (by $2,000 in the example), investors can “bank” those excess losses to offset future gains, which can be carried over only until death under the current law and regardless of whether capital gains tax rates increase in the future.

A careful approach to loss harvesting should be guided by tax and investment professionals to avoid mistakes when managing capital gains and repositioning investments. Savvy investors can use volatile market periods to make strategic investment maneuvers, through selling to capture their available losses, and may consider repurchase of the same or similar position (the same position may be acquired only after 30 days to avoid wash sale rules).  Complications by way of higher taxes can arise from violating wash sale tax rules that effectively disallow a loss if the same security or securities are repurchased within 30 days across various accounts owned by an investor.

In summary, using a tax-effective strategy that looks through a current and future tax lens can keep your savings and investing decisions on the right path for financial success.

The views expressed within this article are those of the author only and not those of BNY Mellon or any of its subsidiaries or affiliates. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

Senior Wealth Strategist, BNY Mellon Wealth Management

As a Senior Wealth Strategist with BNY Mellon Wealth Management, Kathleen Stewart works closely with wealthy families and their advisers to provide comprehensive wealth planning services.  Kathleen focuses on complex financial and estate planning issues impacting wealthy families, key corporate executives and business owners.

Source: kiplinger.com

What Is Crypto Lending and How Do Cryptocurrency Loans Work?

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Borrowing money against your investments is a great way to access your wealth without selling your assets, as well as deferring capital gains taxes. Many wealthy investors have used portfolio loans to access cash in taxable brokerage accounts without needing to sell any of their investments. 

Now, cryptocurrency exchanges are starting to offer the same service for investors. Crypto lending platforms allow users to deposit cryptocurrency and borrow against the value of those assets. Funding is typically very fast, and users can borrow fiat currency (such as U.S. dollars) or stablecoins. 

Although crypto lending is becoming a popular option for long-term investors, it is important to understand how it works, what advantages it provides, and the risks involved.


What Is Crypto Lending?

Crypto lending is a type of secured loan, with crypto assets like Bitcoin or Ethereum being used as collateral to borrow crypto- or fiat currency, such as U.S. dollars. Crypto lending is provided by some crypto exchanges, as well as decentralized applications that use smart contracts to automatically lend crypto to users.


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To borrow funds, users can join a crypto lending platform or exchange, deposit whatever cryptocurrency they wish to pledge as collateral, and then choose from the loan terms that are available. Crypto loans are designed to allow investors to keep their crypto assets while borrowing a portion of their value to use for other investments or simply to access cash.

Crypto loans charge interest on borrowed funds, with interest rates generally higher as the loan-to-value (LTV) rises. For example, taking out a loan for 25% of the value of your pledged crypto may carry a much lower interest rate than taking out a loan that is 50% of your asset value.

Crypto loans come with risks, including the risk of a margin call or liquidation of your collateral. If the value of your pledged assets drop below a certain threshold, the crypto lending platform may issue a margin call, or even liquidate a portion (or all) of your collateral to satisfy the loan. 

Because cryptocurrencies are highly volatile investments, borrowing a higher LTV increases your risk of margin calls.


How Crypto Lending Works

To sign up for a crypto-backed loan, you will need to sign up for a crypto lending platform or connect your digital wallet to a decentralized crypto lending application. You are required to deposit a supported cryptocurrency, such as Bitcoin, which will act as the collateral for your loan.

Once you deposit the funds, you can borrow up to a certain percentage of your digital asset value. Most lending platforms allow you to borrow up to 50% of the currency value of your pledged collateral, with some allowing you to borrow more. 

The loan is typically paid out in fiat currency like U.S. dollars or in stablecoins, such as Tether (USDT). You can then choose your loan term length, with longer terms typically available for lower LTV loans.

Crypto lenders charge interest on your loan, and repayment terms typically require a monthly payment, similar to a mortgage or auto loan. If the value of your collateral drops too significantly during the repayment period, you may get a margin call to deposit more collateral, or the lender may liquidate a portion of your collateral to satisfy the loan obligation.

Overall, crypto loans offer a quick way to access cash or stable crypto assets without the need to sell your original collateral.


Pros & Cons of Cryptocurrency Lending

Although crypto loans have become a popular way to “cash out” your crypto without having to sell it, there are also some risks involved. The volatile nature of cryptocurrency may put your collateral at risk, and loans may also charge high rates depending on the loan terms. Here are a few factors to consider when looking to use a crypto lending platform:

Pros of Cryptocurrency Lending

Crypto lending can be a great way to protect your investments while saving on taxes. There are other advantages as well. Here are a few great advantages of crypto loans:

  1. You Don’t Have to Sell Investments. Crypto loans allow investors to deposit a valued cryptocurrency, such as Ethereum or Bitcoin, and borrow against its value. This helps long-term investors hold onto the original investment while accessing a portion of the value to use however they wish.
  2. No Capital Gains Taxes. Similar to investment portfolio loans, investors who use cryptocurrency loans do not have to sell their collateral, and thus can avoid paying any capital gains taxes on their digital assets.
  3. Fast Funding. Crypto loans are typically approved quickly, and funding can even be received the same day. When using a decentralized lending app, funding is instantaneous.
  4. Reasonable Interest Rates. When comparing some lending platforms to personal loan rates, crypto loans offer decent interest rates, with some platforms offering very low interest rates (under 2% APR) to borrowers.
  5. No Credit Check. Borrowers on crypto lending platforms do not have to pass a credit check to apply for a loan, which helps speed up approval and avoids any hit to your credit score.

Cons of of Cryptocurrency Lending

Although holding onto your crypto investment may be a good long-term investment, crypto loans come with a few risks. Here are some of the downsides of using crypto lending:

  1. Risk of a Margin Call and Liquidation. With the volatility of some cryptocurrency assets, the risk of your collateral losing value and receiving a margin call is high. If you borrow against a high percentage of your cryptocurrency, the risk increases, and you may be forced to deposit more funds or even sell your crypto while the price is down.
  2. No Insurance on Deposits. Unlike investment or bank accounts, deposited crypto funds are not insured, which means if the lending platform fails, your funds may be lost.
  3. Limited Crypto Eligible for Loans. Although popular cryptocurrencies like Bitcoin and Etheruem are typically available to be pledged on crypto lending platforms, not all crypto can be used. Some platforms only support a handful of select crypto, which means you may be required to exchange your crypto for an eligible asset to participate, which is not ideal.
  4. High Interest Rates on Some Platforms. Some crypto lending platforms charge very high interest rates, occasionally charging 10% APR or more. These rates are much higher than most lending products and may be cost prohibitive to borrowers.

How to Borrow & Lend Cryptocurrency

To borrow cryptocurrency, you can sign up for a crypto lending platform, deposit your collateral, and select your loan terms. Once you apply, approval happens fairly quickly, and funding is paid out in fiat currency or crypto stablecoins. 

Loan repayment is typically on a monthly schedule, and repayment term lengths can range from a few weeks to five years or more. Payments can be made in the same currency that was borrowed, but some lending platforms allow you to pay back the loan with other currencies or cryptocurrency.

Crypto lending platforms typically allow you to earn interest on deposited funds that are not pledged for collateral on a loan. Users can deposit from a selection of eligible crypto and begin earning interest right away. The interest rate depends on the crypto deposited, with stablecoins typically paying the highest rates, sometimes over 10% APY. 

When you deposit funds onto a crypto lending platform to earn interest, the platform lends out your cryptocurrency to borrowers, much like a bank handles cash deposits. You still have access to your funds, and most platforms allow you to withdraw your crypto at any time.


Crypto Lending FAQs

Crypto lending platforms offer a great way for crypto investors to borrow against their holdings, saving on taxes and paying a reasonable interest rate on the loan. But is crypto lending right for you? Here are a few of the most common questions about crypto lending:

What Are the Best Crypto Lending Platforms?

The top crypto lending platforms available today offer a relatively wide selection of crypto, low interest rates on loan, and longer loan term lengths. Companies like Celsius allow users to easily deposit funds, post collateral, and apply for a crypto loan. Decentralized apps like Aave and Compound allow users to borrow funds immediately, using smart contracts to quickly set loan terms and repayment options.

Crypto lending also allows users to deposit cryptocurrency to earn interest on those funds. Because the platform can loan out user deposits (similar to a bank), it can pay fairly high interest rates, and users can use crypto lending as a source of passive income.

What Are the Interest Rates on Crypto Loans?

The interest rates on crypto loans vary by the type of collateral pledged, loan terms, and platform being used. Celsius, for example, allows users to borrow up to 25% of their collateral for a 1% APR, which is far lower than most personal loans. But users who want to borrow 50% of their crypto asset value will pay a much higher 8.95% APR.

Is Crypto Lending Safe?

While crypto lending is typically a safe financial instrument, there is no FDIC or SIPC insurance on cryptocurrencies. If the lending platform fails, you may lose access to all your deposited funds. That being said, most crypto lending platforms employ bank-grade security and data encryption, as well as crypto storage and encryption on all funds. Loans are over-collateralized, meaning users cannot typically borrow the total value of their deposited assets, ensuring you should never lose more than what is deposited for the loan.

What Happens if You Default on a Crypto Loan?

If you default on your crypto loan, most lenders will charge additional fees until you repay the loan. If you do not repay the loan, the crypto lender has access to your pledged collateral and will liquidate your position to satisfy the loan, refund any collateral that is left after paying off the balance of your loan.

What Are Some Alternatives to Crypto Loans?

Although crypto loans are an attractive solution to long-term investors who want to hold onto their crypto assets, they do carry their fair share of risks. 

As an alternative to crypto loans, investors may want to explore traditional portfolio loans or lines of credit. Companies like Wealthfront allow users to borrow against their taxable investment accounts; the invested funds are SIPC insured and borrowed funds are in cash, not crypto.

Another alternative to crypto loans is a home equity line of credit (HELOC). These loans allow you to borrow against the value of your home and typically offer low interest rates and long repayment periods.

Borrowing against your assets is a great way to access cash and save on taxes, but always weigh the risks with the rewards of collateralized loans.


Final Word

Crypto lending continues to rise in popularity, with platforms such as Celsius boasting over $19 billion in pledged assets, and over $800 million in interest rewards paid out on crypto deposits. These loans help users hang on to their long-term crypto investments while offering a safe way to access a portion of their crypto portfolio’s value.

Crypto loans carry some risks, though, and users need to be careful of borrowing too much, potentially putting themselves at risk of a margin call or liquidation of their collateral. With the volatility of the crypto market, cryptocurrency is more likely to suffer large swings in price than most other assets, making crypto loans a risky bet.

Overall, crypto lending companies serve users who want to “hodl” their crypto assets while enjoying some of the value of their assets in the meantime.

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Crypto Lending Definition – How Do Cryptocurrency Loans Work?

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Dig Deeper

Additional Resources

Borrowing money against your investments is a great way to access your wealth without selling your assets, as well as deferring capital gains taxes. Many wealthy investors have used portfolio loans to access cash in taxable brokerage accounts without needing to sell any of their investments. 

Now, cryptocurrency exchanges are starting to offer the same service for investors. Crypto lending platforms allow users to deposit cryptocurrency and borrow against the value of those assets. Funding is typically very fast, and users can borrow fiat currency (such as U.S. dollars) or stablecoins. 

Although crypto lending is becoming a popular option for long-term investors, it is important to understand how it works, what advantages it provides, and the risks involved.


What Is Crypto Lending?

Crypto lending is a type of secured loan, with crypto assets like Bitcoin or Ethereum being used as collateral to borrow crypto- or fiat currency, such as U.S. dollars. Crypto lending is provided by some crypto exchanges, as well as decentralized applications that use smart contracts to automatically lend crypto to users.


You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
Get Priority Access

To borrow funds, users can join a crypto lending platform or exchange, deposit whatever cryptocurrency they wish to pledge as collateral, and then choose from the loan terms that are available. Crypto loans are designed to allow investors to keep their crypto assets while borrowing a portion of their value to use for other investments or simply to access cash.

Crypto loans charge interest on borrowed funds, with interest rates generally higher as the loan-to-value (LTV) rises. For example, taking out a loan for 25% of the value of your pledged crypto may carry a much lower interest rate than taking out a loan that is 50% of your asset value.

Crypto loans come with risks, including the risk of a margin call or liquidation of your collateral. If the value of your pledged assets drop below a certain threshold, the crypto lending platform may issue a margin call, or even liquidate a portion (or all) of your collateral to satisfy the loan. 

Because cryptocurrencies are highly volatile investments, borrowing a higher LTV increases your risk of margin calls.


How Crypto Lending Works

To sign up for a crypto-backed loan, you will need to sign up for a crypto lending platform or connect your digital wallet to a decentralized crypto lending application. You are required to deposit a supported cryptocurrency, such as Bitcoin, which will act as the collateral for your loan.

Once you deposit the funds, you can borrow up to a certain percentage of your digital asset value. Most lending platforms allow you to borrow up to 50% of the currency value of your pledged collateral, with some allowing you to borrow more. 

The loan is typically paid out in fiat currency like U.S. dollars or in stablecoins, such as Tether (USDT). You can then choose your loan term length, with longer terms typically available for lower LTV loans.

Crypto lenders charge interest on your loan, and repayment terms typically require a monthly payment, similar to a mortgage or auto loan. If the value of your collateral drops too significantly during the repayment period, you may get a margin call to deposit more collateral, or the lender may liquidate a portion of your collateral to satisfy the loan obligation.

Overall, crypto loans offer a quick way to access cash or stable crypto assets without the need to sell your original collateral.


Pros & Cons of Cryptocurrency Lending

Although crypto loans have become a popular way to “cash out” your crypto without having to sell it, there are also some risks involved. The volatile nature of cryptocurrency may put your collateral at risk, and loans may also charge high rates depending on the loan terms. Here are a few factors to consider when looking to use a crypto lending platform:

Pros of Cryptocurrency Lending

Crypto lending can be a great way to protect your investments while saving on taxes. There are other advantages as well. Here are a few great advantages of crypto loans:

  1. You Don’t Have to Sell Investments. Crypto loans allow investors to deposit a valued cryptocurrency, such as Ethereum or Bitcoin, and borrow against its value. This helps long-term investors hold onto the original investment while accessing a portion of the value to use however they wish.
  2. No Capital Gains Taxes. Similar to investment portfolio loans, investors who use cryptocurrency loans do not have to sell their collateral, and thus can avoid paying any capital gains taxes on their digital assets.
  3. Fast Funding. Crypto loans are typically approved quickly, and funding can even be received the same day. When using a decentralized lending app, funding is instantaneous.
  4. Reasonable Interest Rates. When comparing some lending platforms to personal loan rates, crypto loans offer decent interest rates, with some platforms offering very low interest rates (under 2% APR) to borrowers.
  5. No Credit Check. Borrowers on crypto lending platforms do not have to pass a credit check to apply for a loan, which helps speed up approval and avoids any hit to your credit score.

Cons of of Cryptocurrency Lending

Although holding onto your crypto investment may be a good long-term investment, crypto loans come with a few risks. Here are some of the downsides of using crypto lending:

  1. Risk of a Margin Call and Liquidation. With the volatility of some cryptocurrency assets, the risk of your collateral losing value and receiving a margin call is high. If you borrow against a high percentage of your cryptocurrency, the risk increases, and you may be forced to deposit more funds or even sell your crypto while the price is down.
  2. No Insurance on Deposits. Unlike investment or bank accounts, deposited crypto funds are not insured, which means if the lending platform fails, your funds may be lost.
  3. Limited Crypto Eligible for Loans. Although popular cryptocurrencies like Bitcoin and Etheruem are typically available to be pledged on crypto lending platforms, not all crypto can be used. Some platforms only support a handful of select crypto, which means you may be required to exchange your crypto for an eligible asset to participate, which is not ideal.
  4. High Interest Rates on Some Platforms. Some crypto lending platforms charge very high interest rates, occasionally charging 10% APR or more. These rates are much higher than most lending products and may be cost prohibitive to borrowers.

How to Borrow & Lend Cryptocurrency

To borrow cryptocurrency, you can sign up for a crypto lending platform, deposit your collateral, and select your loan terms. Once you apply, approval happens fairly quickly, and funding is paid out in fiat currency or crypto stablecoins. 

Loan repayment is typically on a monthly schedule, and repayment term lengths can range from a few weeks to five years or more. Payments can be made in the same currency that was borrowed, but some lending platforms allow you to pay back the loan with other currencies or cryptocurrency.

Crypto lending platforms typically allow you to earn interest on deposited funds that are not pledged for collateral on a loan. Users can deposit from a selection of eligible crypto and begin earning interest right away. The interest rate depends on the crypto deposited, with stablecoins typically paying the highest rates, sometimes over 10% APY. 

When you deposit funds onto a crypto lending platform to earn interest, the platform lends out your cryptocurrency to borrowers, much like a bank handles cash deposits. You still have access to your funds, and most platforms allow you to withdraw your crypto at any time.


Crypto Lending FAQs

Crypto lending platforms offer a great way for crypto investors to borrow against their holdings, saving on taxes and paying a reasonable interest rate on the loan. But is crypto lending right for you? Here are a few of the most common questions about crypto lending:

What Are the Best Crypto Lending Platforms?

The top crypto lending platforms available today offer a relatively wide selection of crypto, low interest rates on loan, and longer loan term lengths. Companies like Celsius allow users to easily deposit funds, post collateral, and apply for a crypto loan. Decentralized apps like Aave and Compound allow users to borrow funds immediately, using smart contracts to quickly set loan terms and repayment options.

Crypto lending also allows users to deposit cryptocurrency to earn interest on those funds. Because the platform can loan out user deposits (similar to a bank), it can pay fairly high interest rates, and users can use crypto lending as a source of passive income.

What Are the Interest Rates on Crypto Loans?

The interest rates on crypto loans vary by the type of collateral pledged, loan terms, and platform being used. Celsius, for example, allows users to borrow up to 25% of their collateral for a 1% APR, which is far lower than most personal loans. But users who want to borrow 50% of their crypto asset value will pay a much higher 8.95% APR.

Is Crypto Lending Safe?

While crypto lending is typically a safe financial instrument, there is no FDIC or SIPC insurance on cryptocurrencies. If the lending platform fails, you may lose access to all your deposited funds. That being said, most crypto lending platforms employ bank-grade security and data encryption, as well as crypto storage and encryption on all funds. Loans are over-collateralized, meaning users cannot typically borrow the total value of their deposited assets, ensuring you should never lose more than what is deposited for the loan.

What Happens if You Default on a Crypto Loan?

If you default on your crypto loan, most lenders will charge additional fees until you repay the loan. If you do not repay the loan, the crypto lender has access to your pledged collateral and will liquidate your position to satisfy the loan, refund any collateral that is left after paying off the balance of your loan.

What Are Some Alternatives to Crypto Loans?

Although crypto loans are an attractive solution to long-term investors who want to hold onto their crypto assets, they do carry their fair share of risks. 

As an alternative to crypto loans, investors may want to explore traditional portfolio loans or lines of credit. Companies like Wealthfront allow users to borrow against their taxable investment accounts; the invested funds are SIPC insured and borrowed funds are in cash, not crypto.

Another alternative to crypto loans is a home equity line of credit (HELOC). These loans allow you to borrow against the value of your home and typically offer low interest rates and long repayment periods.

Borrowing against your assets is a great way to access cash and save on taxes, but always weigh the risks with the rewards of collateralized loans.


Final Word

Crypto lending continues to rise in popularity, with platforms such as Celsius boasting over $19 billion in pledged assets, and over $800 million in interest rewards paid out on crypto deposits. These loans help users hang on to their long-term crypto investments while offering a safe way to access a portion of their crypto portfolio’s value.

Crypto loans carry some risks, though, and users need to be careful of borrowing too much, potentially putting themselves at risk of a margin call or liquidation of their collateral. With the volatility of the crypto market, cryptocurrency is more likely to suffer large swings in price than most other assets, making crypto loans a risky bet.

Overall, crypto lending companies serve users who want to “hodl” their crypto assets while enjoying some of the value of their assets in the meantime.

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Source: moneycrashers.com

Buy and Hold Defined – Is This the Right Investment Strategy for You?

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Investor Warren Buffett once famously said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” 

Buffett was describing the buy-and-hold investment strategy. The idea is for investors to research companies before buying shares only in the ones they believe will thrive for the long term.

This passive investment strategy has been used by countless people to build wealth, but what exactly is it, and should you use it in your investment portfolio?


What Is the Buy-and-Hold Investment Strategy?

The buy-and-hold strategy is an investment strategy centered around thoroughly researching a stock, buying it, and holding it for a long period of time regardless of its short-term price fluctuations.


Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)
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With enough research and fundamental analysis, investors should be able to determine whether the company is successful and likely to maintain that success over the next decade or more. Once you’re confident the company is a strong buy, you purchase the stock and pretty much forget about it.

Over the course of a long-term investment, buy-and-hold investors pay little attention to short-term volatility, remaining confident that their original research will lead to a long-term win.  

Because of the set-it-and-forget-it nature of buy-and-hold investing, following this strategy is considered passive investing. However, passive doesn’t necessarily mean no work is involved. For this strategy to work out well, investors must put in significant due diligence in the beginning and rebalance their portfolios at least once annually. 

There are two ways to go about building a buy-and-hold investment portfolio, either through researching and purchasing individual investments or buying shares of investment-grade funds like exchange-traded funds (ETFs), mutual funds, and index funds.


How the Buy-and-Hold Investment Strategy Works

Here are the steps to employing this strategy:

Step #1: Determine How You’d Like to Invest

Start by determining how you’d like to go about investing: by purchasing individual stocks, bonds, and other assets, or by purchasing investment-grade funds. 

Keep in mind that while there’s more work involved in choosing individual assets, doing so gives you the most control over your money. 

Step #2: Choose Your Investments

This step will be different for those choosing individual investments and those investing in funds. Here’s how each works:

Individual Investments

When choosing individual investments, research is the name of the game. Think of stocks and bonds that might represent the type of companies you’re interested in owning. Then, thoroughly research the fundamentals of each company 

During this fundamental analysis, pay close attention to the following:

  • The Company’s Current and Historical Success. How successful is the company at the moment? Since you’re buying assets to hold for the long term, it’s important to invest in companies that have achieved a high level of success and are likely to continue to do so. Is the company one of the strongest in its category? Is it profitable? Is it generating substantial revenue? 
  • Economic Moat. Only invest in companies with an economic moat. This is a term Buffett uses to describe competitive advantages like patents and proprietary supply chains that stop competitors from offering the same products. 
  • Financial Standing. Determine how strong the company is from a financial perspective by digging into its balance sheet. Even profitable companies are often funded by debt, which could be a recipe for disaster. Make sure you’re not investing in companies following that recipe. 
  • Management. A company is only as strong as its management team. Look into who’s running the company and their history as executives, both where they are now and at the companies they helped to lead in the past. Is the team one you want at the helm of a company you own?
  • Valuation. Although short-term fluctuations aren’t important to buy-and-hold investors, it is important that you purchase stock at a fair valuation. Using metrics like the price-to-earnings (P/E) ratio, PEG ratio, and price-to-book value ratio, compare the stock to others in its category and make sure you’re paying a fair stock price when buying shares. 

Investment Grade Funds

When choosing investment-grade funds, you’re letting the fund managers do the work for you, but it’s still important to compare your options. Closely consider the following:

  • Historic Performance. Although historic performance isn’t always indicative of future long-term returns, it’s a good measure of how successful the fund manager has been over time. Look at the rate of returns over the past five to 10 years to get an idea of what you can expect ahead. 
  • Expense Ratio. Investment-grade funds come with an annual cost outlined as an expense ratio, or the percentage of your investment dollars you’ll pay each year to invest in the fund. Make sure you pay the lowest expense ratios possible because high expenses cut into your profits. 
  • Passively Managed. Actively managed funds don’t generally buy and hold assets for a long period of time. As such, it’s important that the funds you choose are passively managed, increasing the holding periods of assets in the portfolio. This will help reduce your tax burden on these investments while allowing you to stick to your strategy of holding assets for the long run. 

Step #3: Buy

Using your favorite brokerage account, purchase the stocks and bonds that you’ve decided have the most potential to generate meaningful long-term returns. If you’re not already working with an online broker, it’s time to start looking around at some of the best brokers online. 

Keep in mind that timing is everything in the stock market. You don’t want to buy on highs just before a correction. One of the best ways to time your buy-and-hold investments is through a gradual process called dollar-cost averaging, which involves making multiple equal investments over a period of time to ensure you don’t buy in at the top.

A common way to buy in gradually is to invest a portion of every paycheck or make automated contributions toward your investments every month or quarter.  

Step #4: Hold

Sometimes the hardest part of using a buy-and-hold strategy is the holding. Markets go up and down all the time. A little market volatility is enough to send some types of investors racing for the exit.  

Buy-and-hold investors who have done their research are holding investments they expect to pay off years down the road, not necessarily this week. Resist the urge to watch the markets every day, because the short-term price fluctuations don’t really matter to you until you decide it’s time to sell your investments. 

Step #5: Rebalance Occasionally

A healthy investment portfolio is one with proper asset allocation, but over time, some assets will move at different rates than others, creating an imbalance. When this happens, your portfolio will either become overexposed to risk or underexposed to potential returns. 

To avoid this issue, investors should rebalance their portfolios at least once annually. Many investors rebalance semi-annually, quarterly, or even monthly. 


Pros and Cons of the Buy-and-Hold Investment Strategy

As with any other strategy for accessing the market, there are pros and cons to consider if you’re thinking about becoming a buy-and-hold investor. 

Pros of the Buy-and-Hold Strategy

Some of the biggest perks to using this strategy include:

1. A Common-Sense Approach

Rather than using intricate technical analysis in an attempt to exploit market volatility, the buy-and-hold strategy takes a more common-sense approach. The goal is to find companies that are successful and likely to maintain their success over time. 

You won’t need complex math, a detailed understanding of technical indicators, or the expertise to find patterns in a chart when taking this approach to investing. 

2. Low Taxes on Capital Gains

Any time you make money in the United States, the IRS wants its cut. That cut is smaller on gains from investments held for a year or more than it is on gains from short-term investments. 

According to the IRS, most investors will pay long-term capital gains taxes of no more than 15%. High-income earners will pay a maximum of 20%. However, short-term capital gains are considered standard income, taxed at the standard income tax rate, which caps out at 37%, according to the Tax Foundation.

3. No Need for Market Timing

You’ll be holding your investments for several years, during which time peaks and valleys will happen. So, there’s no point in trying to time the market to find the best entry point. Instead, buy-and-hold investors are better served using dollar-cost averaging to average their entry cost over a period of time. 

4. Reasonable Returns 

Finally, those that take research seriously at the beginning of this strategy have the potential to yield significant long-term returns. While you’re not going to get rich anytime soon using the buy-and-hold strategy, it is a compelling recipe for building wealth over time. 

Cons of the Buy-and-Hold Strategy

Sure, there are plenty of reasons to follow this strategy, but there are a few drawbacks. 

1. Potentially Lower Returns

Passive investing comes with lower levels of risk, but also a lower potential return than active investing. Those with a higher risk tolerance who want to outpace overall market returns are generally better served as active investors.

2. Hard to Hold Through Bear Markets

Following this strategy means you should hold your investments regardless of market conditions. This can lead to painful declines during bear markets that take some time to recover from. 

3. Time to Profitability

Buy-and-hold investments are made for the long term with little concern for short-term growth. As a result, these investments may take a while to pay off, and in some cases, may never reach profitability. 


Is Buy-and-Hold Investing Right for You?

The question of whether buy-and-hold investing is the best option for your portfolio is impossible to answer without knowing more about you. Everyone has a unique tolerance for risk, goals, and financial circumstances. 

Buy-and-hold investing might be best for you if:

  • You Are Risk-Averse. This strategy tends to focus on steady, stable companies with a proven record of success, making it a strong option for risk-averse investors. 
  • You Are Patient. This strategy is a slow-growth option. Although you won’t get rich overnight, it is a tried-and-true way for a patient investor to build wealth over the long run.
  • You Are Busy. Although there is some upfront work involved in this strategy, once your investments are set up, there’s really not much left to do. That makes buy-and-hold a perfect strategy for people who don’t have the time or desire to constantly check in on markets and the companies they invest in.  

Final Word

The buy-and-hold strategy is a compelling way for patient and risk-averse investors to capture the wealth-building power of financial markets. If you choose to follow this strategy, keep in mind that research will be the foundation of your success. 

Take the time to get to know each investment before throwing your hard-earned money into the ring, and you’ll be pleasantly surprised with the long-term results. 

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Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

Retirees: Here’s How to Pay for 5 Common Expenses and Cut Your Taxes While Doing It

Even though the April 18 income tax deadline has passed, it’s worth exploring how to plan to pay for some common expenses in retirement to receive the most tax benefits, ahead of the next filing deadline in April. 

One of the most foundational tax-planning questions a retiree faces is how to best pay for expenses while minimizing the tax impact.  Fortunately, the Internal Revenue Service allows several tax-advantaged ways to accomplish this goal, depending on the funding source and type of expense.  

Here are five common expenses in retirement that could cut your tax bill:

Fund a Grandchild’s Education from a 529 Plan

Anyone can contribute to a 529 plan to help pay for a child or grandchild’s education.  This money has several advantages: tax-free growth, tax-free withdrawals if used for qualified education expenses, and no estate taxes due.  Contributions count toward the annual $16,000 per person annual gift tax exclusion limit; however, a unique tax rule for 529 plans allows donors to effectively front-load up to five years’ worth of contributions and avoid gift taxes.

About 30 states offer a state income tax deduction for 529 plan contributions.  For example, Georgia provides a deduction on contributions up to $8,000 per beneficiary to the state’s Path2College 529 plan. 

While people in states without state income tax incentives don’t receive a tax deduction, there may be other long-term benefits.  For example, someone may want to move assets out of their taxable estate, have a concern for higher income tax rates in the future, or simply like the idea of having assets for education earmarked in a separate, designated account for a grandchild or family member.      

Pay for Medical Expenses from a Health Savings Account

HSA contributions are tax-deductible, the funds grow tax-free, and distributions are tax-free if used for qualified medical expenses.  Many retirees during their working years contributed to Health Savings Accounts and used their earned income to pay for healthcare costs to allow the HSA funds to grow.

While people can’t fund an HSA once they begin receiving Medicare, they can use an HSA to pay for out-of-pocket medical expenses such as doctor’s bills and prescriptions.  The funds can even be used to pay for Medicare Parts B and D premiums.

Since HSA distributions for qualified medical expenses are tax-free, retirees with this type of account can reduce their need to take withdrawals to pay for medical costs using other taxed sources, such as IRAs and 401(k)s.  The tax impact over time in retirement could translate into thousands of dollars saved, especially for retirees who aren’t able to offset taxable withdrawals by itemizing their medical costs.  

Pay for Long-Term Care Insurance Premiums from an Annuity

The IRS allows a strategy, called a partial 1035 exchange, to pay for long-term care premiums from a non-qualified annuity without creating a taxable event.  Since the growth in a non-qualified annuity will eventually be taxed as ordinary income, taking a portion each year out of the annuity to pay the long-term care insurance premium can help reduce a retiree’s eventual tax burden.  

There are a few technical considerations to make sure this works for your situation.  These include the impact of otherwise deducting the LTC premium payments on your taxes, the financial need for the annuity payments, and checking with your annuity company to ensure that they can facilitate this transaction.  It’s also important to note that this exchange will create a pro-rata reduction in your annuity cost basis.  

This strategy can be an effective way to minimize taxes for people who don’t need to tap their annuity yet, and who would otherwise need to take a taxable distribution from a retirement account to pay the premiums.  

Make Charitable Donations from an IRA

Many retirees who contribute to their favorite non-profit organizations don’t receive a tax benefit since their standard deduction exceeds any itemized deductions.  Account owners age 70.5 and older could benefit by using their IRA as the source of their giving, a strategy called a Qualified Charitable Distribution (QCD).

While you do not receive a tax deduction for a QCD, the distribution is not taxed.  Lower top-level income could lead to other benefits, such as lowering Medicare premium surcharges.  Keep in mind that the distribution must be taken directly from your IRA for the amount to be excluded from income.  Account owners can donate up to $100,000 per year from their IRA, and the QCD amount goes toward your annual required minimum distribution.

Make Family Gifts from Investments or Business Interests

Many retirees who give money to a child or grandchild just write a check.  However, if a large portion of their wealth is in a tax-deferred account, a taxable investment portfolio or a business, they may want to consider making this gift from a portion of an appreciated asset or business interest.  

Here’s a simple example.  If you have held Apple stock for years, instead of writing a check for $10,000 as a Christmas gift, give a grandchild the gift of $10,000 of your stock.  While the grandchild will eventually owe taxes on any sale, they can learn about investing by watching the price (hopefully) appreciate, and the capital gains taxes may be comparably lower for them.  The retiree saves money on the capital gains tax and also reduces the size of the estate.

While a tax law provision called “step-up in basis” — which adjusts the value of the assets someone inherits at the owner’s death — could leave heirs with a smaller income tax bill if they later sell the positions, there are good reasons for gift-givers to use appreciated stock or mutual funds instead of cash. They may want to lower the size of their taxable estate, reduce a large position in one or more stocks, or let a young family member gain firsthand experience investing in the stock market.

These five expenses don’t cover every situation for every retiree but considering these recommendations could end up saving a few hundred or a few thousand dollars annually.

Wealth Adviser, Brightworth

Chase Mouchet is a wealth adviser at Brightworth, a wealth management firm with offices in Atlanta and Charlotte with $3 billion in assets under management, serving over 1,200 families in 48 states. He is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Certified Investment Management Analyst® certification, administered by Investments & Wealth Institute and taught in conjunction with the Yale School of Management.

Source: kiplinger.com

Why Now Might Be a Good Time to Sell Your Investment Real Estate

Historically speaking, independent real estate investors who held for the long-term walked a relatively straightforward (although bumpy and slow at times) path toward achieving asset appreciation and long-term wealth. This path would often look something like this: An investor would purchase a piece of property that would potentially generate enough cash flow to cover the expenses, including principal and interest on the mortgage, insurance, property taxes and maintenance costs. Over time, the property would (hopefully) increase in value, income (rents) would rise, and certain tax advantages, like the ability to deduct operating and depreciation expenses, could be utilized to improve cash flow.

However, the steady march of new government regulations, the impact of COVID-19, and some basic real estate economics have helped some real estate investors recognize that the real estate investments they own have become less profitable and could even worsen to the point where investors could actually lose money each year.

The Growing Impact of Rent Control Before and After COVID-19

While this may sound like hyperbole to some, our firm is actively working with numerous apartment owners across the country, and we hear firsthand some of the challenges and pressures property owners are facing. Even national media are picking up on this trend. For example, a  recent Wall Street Journal article cites that apartment owners and investors are leaving California and the Northeast for places like Florida, Texas and the other Southern states where warm weather, business-friendly governments and laws, lower taxes and fewer regulations seem like a breath of fresh air.

Reuters recently lamented that beset by COVID-19 and its fallout, many smaller local landlords are offloading their properties and selling to national institutional investors, and CNBC recently reported that at least 60% of single-family rental homeowners are owed back rent and are being forced to sell their rental properties to recoup losses. Finally, CBS announced that as a last-ditch effort to claw back tens of billions of dollars in unpaid rent, a national group of landlords is suing the federal government for back rent.

However, even before COVID-19 rolled across the nation’s multifamily rental real estate investment market, landlords were seeing new rent-control legislation start to encroach on their investment real estate portfolios, and squeeze owners’ profits. When COVID-19 arrived in the United States, cities across the country started expanding rent-control laws and eviction moratoriums at an alarming rate, directly exposing landlords to financial peril. Legally speaking, the term “rent control” can be defined as any statutory rule that regulates the timing or frequency of increasing tenants’ rent, the services landlords must provide tenants, and the limited ability of landlords to evict tenants.

Today, multiple cities, states and jurisdictions are under some form of strict rent-control regulation, including Washington, D.C., Maryland, New Jersey and New York. Most recently, Oregon and California have enacted statewide rent-control laws that have greatly reduced landlords’ ability to raise rates. Cities like Santa Ana and St. Paul have both passed bills limiting rent increases to 3% a year. Seattle even passed a bill requiring landlords to pay the moving costs for tenants who can’t afford to stay in their homes, and Los Angeles passed a law that protects tenants from eviction for unpaid rent.

Perhaps no other region in the nation is more challenging for landlords than California’s Bay Area. For example, Berkely has had one of the strictest rent-control environments in the country, capping not only rents, but also garbage and parking fees; Hayward caps rent increases at just 5%, and rent increases following voluntary move-outs cannot be more than 5%; Oakland’s Rent Adjustment Program (RAP) limits rental increases to 30% in a five-year tenancy.

Even more worrisome for landlords, cities like Portland and Oakland have recently created new restrictions limiting the ability of landlords to screen potential tenants, including:

  • Prohibiting the use of criminal background checks.
  • Limiting the use of financial background checks.
  • Requiring landlords to accept previously evicted tenants.
  • Limiting security deposits to 1.5 x month’s rent.

Adding to these growing restrictive rental laws, landlords today must also face the reality of complicated and costly eviction laws and the soaring costs associated with repairs and maintenance.

Finally, many owners are recognizing that perhaps their rental property may not make as much financial sense as it once did. Why?  Well, for several years now, property values in certain situations have risen faster than an owner’s ability to raise rents. The result is that the cash-on-cash return, or “equity yield,” gets compressed the higher property values rise. In some cases, this cash-on-cash return can be squeezed from a double-digit return to a low single-digit return. Add to this the uncertain factors, like inflation and unemployment, higher taxes, and a softening rental market, combined with city- and government-imposed rent-control and eviction moratoriums, and more landlords are coming to the conclusion that now might be potentially a good time to sell their investment real estate.

Enter the Delaware Statutory Trust and Passive Real Estate Investing

So why don’t rental owners simply take their equity positions and cash out? The simple answer because of the tax liabilities — including federal capital gains (15%-20%), state capital gains (0%-13.3% depending on the state), depreciation recapture tax (25%) and possibly the Medicare surtax (3.8%) — will now be due upon sale. These associated taxes could potentially take up to 40% of the asset’s sale price out of the seller’s proceeds.

In addition, while it is true that a 1031 exchange would allow them to defer their taxes, it is also true that they would most likely be limited to exchanging into another multifamily building or a single-tenant NNN building. What’s the problem with these assets? Nothing, except investing in another multifamily building doesn’t offer the owner much diversification, and because the proverbial “Three T’s” of tenants, toilets and trash will still be involved, there will always be headaches and management expenses involved. A single-tenant net-lease property relies heavily on the quality of that sole tenant, and if that tenant fails, the investor’s income is likely to be reduced or eliminated (during COVID-19 there were a number of NNN tenants who went bankrupt or sought rental relief from their landlords). Also, triple net lease properties can be hard to locate, and conducting proper due diligence can be difficult to accomplish within the time frame of 1031 exchange.

That’s why many landlords are utilizing Delaware Statutory Trust (DST) 1031 exchanges to exit the active management role of owning rental real estate.  Delaware Statutory Trusts are a form of fractional ownership that can be used to make passive investments in real estate and achieve monthly income potential via ACH direct deposit and diversification across multiple assets. Also, because DSTs are eligible for 1031 exchanges, investors can sell their investment property and reinvest the proceeds into one or more DST investments while deferring capital gains and other taxes.

Another reason DST investments are popular among real estate investors is because many types of diverse real estate assets can be owned in a DST, including industrial, multifamily, self-storage, medical and retail properties. Also, it is not uncommon to find properties within a DST investment that include institutional-quality assets like those owned by large investment firms, such as a 450-unit Class A multifamily apartment community or a 100,000-square-foot industrial distribution facility leased to a Fortune 500 logistics and shipping company.

In addition, Delaware Statutory Trust 1031 exchanges offer real estate investors the following specific potential benefits as well:

  • The ability to close their 1031 exchange within typically three to five days.
  • The opportunity to eliminate the hassles of tenants, toilets, and trash (i.e.. the Three T’s).
  • The potential to receive regular monthly distributions via ACH direct deposits/
  • The ability to access institutional-grade real estate assets.
  • The potential advantages associated with greater portfolio diversification by geography, tenants, and asset class.*

The Bottom Line

Investment properties have gone through significant changes over recent years, and in many cases, owners have been faced with challenges they have never seen before, including the COVID-19 pandemic, and ensuing eviction moratoriums. For qualified property owners who are motivated to sell soon and are facing capital gains, reinvesting the proceeds in qualifying properties, including DSTs, will allow them to not only defer capital gains taxes but also become part of a diversification* strategy with the potential for appreciation and monthly income.

*Diversification does not guarantee returns and does not protect against loss.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities, including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.
Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. Securities offered through FNEX Capital, member FINRA.

Founder and CEO, Kay Properties and Investments, LLC

Dwight Kay is the Founder and CEO of Kay Properties and Investments LLC. Kay Properties is a national 1031 exchange investment firm. The www.kpi1031.com platform provides access to the marketplace of 1031 exchange properties, custom 1031 exchange properties only available to Kay clients, independent advice on sponsor companies, full due diligence and vetting on each 1031 exchange offering (typically 20-40 offerings) and a 1031 secondary market. 

https://brokercheck.finra.org/firm/summary/124658

Source: kiplinger.com

7 Rules for Taking a Work From Home Tax Deduction

If you’re one of the millions of people who worked remotely in 2021, you may be wondering whether that means a sweet deduction at tax time. Hold up, though: The IRS has strict rules for taking the home office deduction.

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7 Essential Rules for Claiming a Work From Home Tax Deduction

Thinking about claiming a home office deduction on your tax return? Follow these tips to avoid raising any eyebrows at the IRS when you file your 2021 tax return, which is due on April 18, 2022.

1. You can’t claim it if you’re a regular employee, even if your company is requiring you to work from home due to COVID-19.

If you’re employed by a company and you work from home, you can’t deduct home office space from your taxes. This applies whether you’re a permanent remote worker. It also applies if your office was temporarily closed in 2021 because of the pandemic. The rule of thumb is that if you’re a W-2 employee, you’re not eligible for a work-from-home tax deduction.

This wasn’t always the case, though. The Tax Cuts and Jobs Act of 2017 suspended the deduction for miscellaneous unreimbursed employee business expenses, which allowed you to claim a home office if you worked from home for the convenience of your employer, provided that you itemized your tax deductions. The law nearly doubled the standard deduction. As a result, many people who once saved money by itemizing now have a lower tax bill when they take the standard deduction.

2. If you have a regular job but you also have self-employment income, you can qualify.

If you’re self-employed — whether you own a business or you’re a freelancer, gig worker or independent contractor — you probably can take the deduction, even if you’re also a full-time employee of a company you don’t own. It doesn’t matter if you work from home at that full-time job or work from an office, as long as you meet the other criteria that we’ll discuss shortly.

You’re only allowed to deduct the gross income you earn from self-employment, though. That means if you earned $1,000 from your side hustle plus a $50,000 salary from your regular job that you do remotely, $1,000 is the most you can deduct.

3. It needs to be a separate space that you use exclusively for business.

The IRS requires that you have a space that you use “exclusively and regularly” for business purposes. If you have an extra bedroom and you use it solely as your office space, you’re allowed to deduct the space — and that space alone. So if your house is 1,000 square feet and the home office is 200 square feet, you’re allowed to deduct 20% of your home expenses.

But if that home office also doubles as a guest bedroom, it wouldn’t qualify. Same goes for if you’re using that space to do your day job. The IRS takes the word “exclusively” pretty seriously here when it says you need to use the space exclusively for your business purposes.

To avoid running afoul of the rules, be cautious about what you keep in your home office. Photos, posters and other decorations are fine. But if you move your gaming console, exercise equipment or a TV into your office, that’s probably not. Even mixing professional books with personal books could technically cross the line.

A man works from home while watching his daughter.
Getty Images

4. You don’t need a separate room.

There needs to be a clear division between your home office space and your personal space. That doesn’t mean you have to have an entire room that you use as an office to take the deduction, though. Suppose you have a desk area in that extra bedroom. You can still claim a portion of the room as long as there’s a marker between your office space and the rest of the room.

Here’s an easy way to separate your home office from your personal space, courtesy of TurboTax Intuit: Mark it with duct tape.

5. The space needs to be your principal place of business.

To deduct your home office, it needs to be your principal place of business. But that doesn’t mean you have to conduct all your business activities in the space. If you’re a handyman and you get paid to fix things at other people’s houses, but you handle the bulk of your paperwork, billing and phone calls in your home office, that’s allowed.

There are some exceptions if you operate a day care center or you store inventory. If either of these scenarios apply, check out the IRS rules.

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6. Mortgage and rent aren’t the only expenses you can deduct. 

If you use 20% of your home as an office, you can deduct 20% of your mortgage or rent. But that’s not all you can deduct. You’re also allowed to deduct expenses like real estate taxes, homeowner insurance and utilities, though in this example, you’d only be allowed to deduct 20% of any of these expenses.

Be careful here, though. You can only deduct expenses for the part of the home you use for business purposes. So using the example above, if you pay someone to mow your lawn or you’re painting your kitchen, you don’t get to deduct 20% of the expenses.

You’ll also need to account for depreciation if you own the home. That can get complicated. Consider consulting with a tax professional in this situation. If you sell your home for a profit, you’ll owe capital gains taxes on the depreciation. Whenever you’re claiming deductions, it’s essential to keep good records so you can provide them to the IRS if necessary.

If you don’t want to deal with extensive record-keeping or deducting depreciation, the IRS offers a simplified option: You can take a deduction of $5 per square foot, up to a maximum of 300 square feet. This method will probably result in a smaller deduction, but it’s less complicated than the regular method.

7. Relax. You probably won’t get audited if you follow the rules.

The home office deduction has a notorious reputation as an audit trigger, but it’s mostly undeserved. Deducting your home office expenses is perfectly legal, provided that you follow the IRS guidelines. A more likely audit trigger: You deduct a huge amount of expenses relative to the income you report, regardless of whether they’re related to a home office.

It’s essential to be ready in case you are audited, though. Make sure you can provide a copy of your mortgage or lease, insurance policies, tax records, utility bills, etc., so you can prove your deductions were warranted. You’ll also want to take pictures and be prepared to provide a diagram of your setup to the IRS if necessary.

As always, consult with a tax adviser if you’re not sure whether the expense you’re deducting is allowable. It’s best to shell out a little extra money now to avoid the headache of an audit later.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].

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Source: thepennyhoarder.com

Don’t Let Taxes Dim Your Retirement: How to Plan Ahead with Your ‘Tax Bucket List’

Taxes are on the minds of many this time of year with the filing deadline looming. But too often, people think about taxes only on a one-year-at-a-time basis, forgetting or putting off the need to adjust their strategy for future years – most importantly, their retirement.

As you prepare for your non-working years, it’s important to consider the burden taxes can pose in retirement. Being proactive and developing a tax-efficient strategy is especially important for those who will retire soon. If you have a tax-deferred retirement account (IRA, 401(k), 403(b), SEP, etc.), you unfortunately have an account that has one of the same features as a variable-rate mortgage. At any point, the IRS can change the rate (here, though, it is the tax rate rather than the interest rate).

Some financial professionals think that given our growing national debt, tax rates will likely go up at some point in the next few years – rising from the historically low rates we have now. And remember that when you withdraw money from one of your tax-deferred retirement accounts, whether because you need the money or you were forced to due to required minimum distributions, you must pay taxes on every dollar.

Do you know what your tax rate will be one, five or 10 years from now? Perhaps you want to withdraw as little as possible and leave it to your children. Do you know what taxes they will have to pay on those funds 10, 20 or 30 years from now? And the future tax burden your spouse could face after your passing is something you must also consider.

The good news is that you can take steps to preserve some of your money in tax-free environments, thereby reducing your debt to the IRS. First, consider the three “tax buckets”:

  • Tax-deferred bucket. These are assets such as traditional IRAs, 401(k)s and deferred annuities within a qualified retirement plan, etc. These accounts generally grow tax-deferred, which means you only pay taxes when you withdraw the money.
  • Taxable bucket. This is the money you have probably already paid taxes on, and if you invest it, you pay taxes when you realize a return. These are non-IRA assets, such as brokerage accounts, savings accounts or certificates of deposits at your bank.
  • Tax-free bucket. This money grows tax-free, and whether you withdraw your gains or leave the money to your beneficiaries after your death, it is tax-free, subject to certain limitations. These assets include Roth IRAs and life insurance.

It’s more common to have most of your money in the tax-deferred and taxable buckets. If you are interested in being proactive for the long term, here are two strategies worth considering to put more in your tax-free bucket:

Roth IRA conversions

Some conditions must be met to contribute to a Roth IRA, such as earned income, income limits and contribution limits, so not everyone can contribute to a Roth. However, converting your tax-deferred money to a Roth IRA is possible for everyone. A Roth conversion must keep the big picture in mind, but if we look at the long-term savings of a Roth conversion, it can be significant.

Here’s an example of a married couple, Greg and Tina, both aged 65 with an annual income of $75,000, whose goal is to convert $200,000 of a traditional IRA (tax-deferred) to a Roth IRA (tax-free). The tax impact on them from a traditional IRA vs. a Roth IRA is based on these assumptions: living through age 90, a 25% effective tax rate (combined federal and state) on RMDs and taxes paid on death, a 15% capital gains tax on reinvested RMDs, and a 5% average rate of return over the period. In a $200,000 conversion to a Roth IRA, they would pay $46,000 in taxes – in the year of their conversion – under the current tax code. If Greg and Tina do nothing (do not convert to a Roth IRA) and instead simply draw their required minimum distributions beginning at age 72 until they have both passed away (surviving spouse passes at age 95), they would pay $62,692 over that period of time.

The bigger tax savings are down the road. For a Roth IRA, their taxes on reinvested funds are $0, and the taxes on the value at death are $0. Total taxes paid for the Roth IRA: the $46,000 paid for the one-year conversion.

By contrast, capital gains taxes on reinvested RMDs for the traditional IRA are $26,796. Taxes on value at death for the traditional IRA: $41,665. Total taxes paid if they had stuck with the traditional IRA: $131,153.

Note: A Roth conversion is a taxable event and may have several tax-related consequences. Be sure to consult with a qualified tax adviser before making any decisions regarding your IRA. This is a hypothetical example provided for illustrative purposes only; it does not represent a real-life scenario and should not be construed as advice designed to meet the particular needs of an individual’s situation.

Life insurance

High-income earners are not the only group of investors who turn to life insurance. Pre-retirees and retirees are interested in this option because, in addition to the death benefit and potential for tax-free income, if the contract includes the additional benefits of long-term care, they can kill two birds with one stone.

The death benefit is also tax-free. If you are looking for the following features, a permanent life insurance policy might be a consideration for you:

  • Tax-free death benefit for heirs
  • No income limitation on contributions
  • Tax-free growth
  • Tax-free withdrawals
  • Tax-free long-term care benefits (with the purchase of
  • an added LTC rider)

Keep in mind, however, that because this is life insurance, there are fees and charges, including surrender penalties for early withdrawals. You will need to qualify for the policy medically and perhaps financially and fund it appropriately for it to remain in force.

If you want the IRS to take the smallest bite possible out of your money, consider these strategies, which allow you to convert your tax-deferred money into tax-free money. Being proactive is the key to enjoying your retirement more on your terms.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Life insurance policies are contracts between your client and an insurance company. Life insurance guarantees rely on the financial strength and claims-paying ability of the issuing insurer. This article is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Insurance offered through J. Biance Financial, 545 S. Pine Street Sebring, FL 33870 863-304-8959. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and J. Biance Wealth Management are not affiliated companies. 01232363 03/22

Principal, J. Biance Financial

Justin M. Biance, a Certified Estate Planner and principal at J. Biance Financial (www.jbiance.com), is the author of “The Great Inheritance: 7 Steps to Leaving Behind More Than Your Money.” He specializes in multigenerational legacy planning.

Source: kiplinger.com

Tax-Loss Harvesting

Tax-loss harvesting enables investors to use investment losses to help reduce the tax impact of investment gains, thus potentially lowering the amount of taxes owed. While a tax loss strategy – sometimes called tax loss selling — is often used to offset short-term capital gains (which are taxed at a higher federal tax rate), tax-loss harvesting can also be used to offset long-term capital gains.

Of course, as with anything having to do with investing and taxes, tax-loss harvesting is not simple. In order to carry out a tax-loss harvesting strategy, investors must adhere to specific IRS rules and restrictions. Here’s what you need to know.

Table of Contents

What Is Tax-Loss Harvesting?

Tax-loss harvesting is a strategy that enables an investor to sell assets that have dropped in value as a way to offset the capital gains tax they may owe on the profits of other investments they’ve sold. For example, if an investor sells a security for a $25,000 gain, and sells another security at a $10,000 loss, the loss could be applied so that the investor would only see a capital gain of $15,000 ($25,000 – $10,000).

While there’s more to the strategy than just a 1:1 application of losses to gains, as you’ll see in the sections below, a tax-loss harvesting strategy can be an important part of a tax-efficient investment strategy.

How Tax-Loss Harvesting Works

In order to understand how tax-loss harvesting works, you first have to understand the system of capital gains taxes.

Capital Gains and Tax-Loss Harvesting

As far as the IRS is concerned, capital gains are either short term or long term:

•   Short-term capital gains and losses are from the sale of an investment that an investor has held for one year or less.

•   Long-term capital gains and losses are those recognized on investments sold after one year.

The one-year mark is crucial, because the IRS taxes short-term investments at the much-higher marginal income tax rate of the investor. For high earners that can be as high as 37%, plus a 3.8% net investment income tax (NIIT). That means the taxes on those quick gains can be as high as 40.8% — and that’s before state and local taxes are factored in.

Meanwhile, the long-term capital gains taxes for an individual are simpler and lower. These rates fall into three brackets, according to the IRS: 0%, 15%, and 20%. Here are the rates for 2021-22, per the IRS.

Capital Gains Tax Rate Income – Single Married, filing separately Head of household Married, filing jointly
0% Up to $40,400 Up to $40,400 Up to $54,100 $80,800
15% Over $40,400 to $445,850 Over $40,400 to $250,800 Over $54,100 to $473,750 Over $80,801 to $501,600
20% Over $445,850 Over $250,800 Over $473,750 Over $501,600

As with all tax laws, don’t forget the fine print. For instance, the additional 3.8% NIIT may apply to single individuals earning at least $200,000 or married couples making at least $250,000. Also, long-term capital gains from sales of collectibles (e.g, coins, antiques, fine art) are taxed at a maximum of 28% rate; this is separate from regular capital gains tax, not in addition. Short-term gains on collectibles are taxed at the ordinary income tax rate.

Rules of Tax-Loss Harvesting

The upshot is that investors selling off profitable investments can face a stiff tax bill on those gains. That’s typically when investors (or their advisors) start to look at what else is in their portfolios. Inevitably, there are likely to be a handful of other assets such as stocks, bonds, real estate, or different types of investments that lost value for one reason or another.

“Harvesting” these capital losses is a way to reduce the pain of capital gains tax. While tax-loss harvesting is typically done at the end of the year, investors can use this strategy any time.

Bear in mind that although a capital loss technically happens whenever an asset loses value, it’s considered an “unrealized loss” in that it doesn’t exist in the eyes of the IRS until an investor actually sells the asset and realizes the loss.

The loss at the time of the sale can be used to count against any capital gains made in a calendar year. Given the high taxes associated with short-term capital gains, it’s a strategy that has many investors selling out of losing positions at the end of the year.

Example of Tax-Loss Harvesting

If you’re wondering how tax-loss harvesting works, here’s an example. Let’s say an investor is in the top income tax bracket for capital gains. If they sell investments and realize a long-term capital gain, they would be subject to the top 20% tax rate; short-term capital gains would be taxed at their marginal income tax rate of 37%.

Now, let’s imagine they have the following long- and short-term gains and losses, from securities they sold and those they haven’t:

Securities sold:

•   Stock A, held for over a year: Sold, with a long-term gain of $175,000

•   Mutual Fund A, held for less than a year: Sold, with a short-term gain of $125,000

Securities not sold:

•   Mutual Fund B: an unrealized long-term gain of $200,000

•   Stock B: an unrealized long-term loss of $150,000

•   Mutual Fund C: an unrealized short-term loss of $80,000

The potential tax liability from selling Stock A and Mutual Fund A, without tax-loss harvesting, would look like this:

•   Tax without harvesting = ($175,000 x 20%) + ($125,000 x 37%) = $35,000 + $46,250 = $81,250

But if the investor harvested losses by selling Stock B and Mutual Fund C (remember: long-term losses apply to long-term gains and short term losses to short term gains first), the tax picture would change considerably:

•   Tax with harvesting = (($175,000 – $150,000) x 20%) + (($125,000 – $80,000) x 37%) = $5,000 + $16,650 = $21,650

Note how the tax-loss harvesting strategy not only reduces the investor’s tax bill, but potentially frees up some money to be reinvested in similar securities (restrictions may apply there; see information on the wash sale rule below).

Considerations Before Using Tax-Loss Harvesting

As with any investment strategy, it makes sense to think through a decision to sell just for the sake of the tax benefit because there can be other ramifications in terms of your long-term financial plan.

The Wash Sale Rule

For example, if an investor sells losing stocks or other securities they still believe in, or that still play an important role in their overall financial plan, then they may find themselves in a bind. That’s because a tax regulation called the wash sale rule prohibits investors from receiving the benefit of the tax loss if they buy back the same investment too soon after selling it.

Under the IRS wash sale rule, investors must wait 30 days before buying a security or another asset that’s “substantially identical” to the one they just sold. If they do buy an investment that’s the same or substantially identical, then they can’t claim the tax loss. But for an investment that’s seen losses, that 30-day moratorium could mean missing out on growth — and the risk of buying it again later for a higher price.

Matching Losses With Gains

Investors must also be careful which securities they sell. Under IRS rules, like goes with like: So, long-term losses must be applied to long-term gains first, and the same goes for short-term losses and short-term gains. After that, any remaining net loss can be applied to either type of gain.

How to Use Net Losses

The difference between capital gains and capital losses is called a net capital gain. If losses exceed gains, that’s a net capital loss.

•   If an investor has an overall net capital loss for the year, they can deduct up to $3,000 against other kinds of income — including their salary and interest income.

•   Any excess net capital loss can be carried over to subsequent years and deducted against capital gains, and up to $3,000 of other kinds of income — depending on the circumstances.

•   For those who are married filing separately, the annual net capital loss deduction limit is only $1,500.

How to Use Tax-Loss Harvesting to Lower Your Tax Bill

When an investor has a diversified portfolio, every year will likely bring investments that thrive and others that lose money, so there can be a number of different ways to use tax-loss harvesting to lower your tax bill. The most common way, addressed above, is to apply capital losses to capital gains, thereby reducing the amount of tax owed. Here are some other strategies:

Tax-Loss Harvesting When the Market Is Down

For investors looking to invest when the market is down, capital losses can be easy to find. In those cases, some investors can use tax-loss harvesting to diminish the pain of losing money. But over long periods of time, the stock markets have generally gone up. Thus, the opportunity cost of selling out of depressed investments can turn out to be greater than the tax benefit.

It also bears remembering that many trades come with trading fees and other administrative costs, all of which should be factored in before selling stocks to improve one’s tax position at the end of the year.

Tax-Loss Harvesting for Liquidity

There are years when investors need access to capital. It may be for the purchase of a dream home, to invest in a business, or because of unforeseen circumstances. When an investor wants to cash out of the markets, the benefits of tax-loss harvesting can really shine.

In this instance, an investor could face bigger capital-gains taxes, so it makes sense to be strategic about which investments — winners and losers — to sell by year’s end.

Tax-Loss Harvesting to Rebalance a Portfolio

The benefits of maintaining a diversified portfolio are widely known. And to keep that portfolio properly diversified in line with their goals and risk tolerance, investors may want to rebalance their portfolio on a regular basis.

That’s partly because different investments have different returns and losses over time. As a result, an investor could end up with more tech stocks and fewer energy stocks, for example, or more government bonds than small-cap stocks than they intended.

Other possible reasons for rebalancing are if an investor’s goals change, or if they’re drawing closer to one of their long-term goals and want to take on less risk.

That’s why investors check their investments on a regular basis and do a tune-up, selling some stocks and buying others to stay in line with the original plan. This tune-up, or rebalancing, is an opportunity to do some tax-loss harvesting.

The Takeaway

Tax loss harvesting, or selling off underperforming stocks and then taking a tax credit for the loss, can be a helpful part of a tax-efficient investing strategy.

There are many reasons an investor might want to do tax-loss harvesting, including when the market is down, when they need liquidity, or when they are rebalancing their portfolio. It’s an individual decision, with many considerations for each investor — including what their ultimate financial goals might be.

If you’re ready to develop your own investing strategy, you can open an online brokerage account with SoFi Invest® and begin trading stocks, ETFs, or even crypto with as little as $10. As a SoFi member, you also get access to advice from financial professionals who can help answer your questions.

Find out how SoFi Invest can help you meet your financial goals.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Source: sofi.com