How you might not have to pay capital gains tax for 2021

On Behalf of | Feb 22, 2022 | Cryptocurrency

If you sold stock or cryptocurrency at a profit last year, you might be worried about a big capital gains tax bill. But there is a good chance the IRS will not tax that income at all.

The federal long-term capital gains tax rates start at zero percent for up to $40,400 net income for those filing individually. For married couples filing jointly, the first $80,800 of long-term capital gains net income per year goes untaxed.

Are you under the line?

Remember that net income means gross income minus deductions. So let’s say you and your spouse earned $100,000 from selling stock or crypto last year. If you take the standard deduction of $25,100 for joint tax filings, your net income from those sales would be $74,900 — putting you below the threshold for taxable capital gains income. Depending on what itemized deductions you qualify for, you might be able to avoid capital gains tax on an even greater amount of gross income.

More sophisticated strategies, like selling and rebuying an asset on a “stepped-up basis,” can also help minimize or potentially eliminate your capital gains tax bill. You can discuss these strategies with your accountant or tax preparer.

Don’t panic if you are being audited

Of course, you need to be careful to report all your yearly income and claim deductions according to the applicable tax laws. Mistakes can lead to that thing nobody wants — a letter from the IRS. Fortunately, an audit is not the end of the world. You can work with the IRS to find a fair and affordable solution.