Welcome Back, Fellow Parent

As we wrap up our tax series, it’s time to tackle one of the most complex yet rewarding areas: taxes for investors and crypto enthusiasts.

From capital gains to crypto transactions, knowing how to navigate these waters can save you significant money and stress.

In case you missed it (or deleted it), here are links to the first two parts of our Tax Series:

• Part 1: Tax Tips for Families

• Part 2: Tax Tips for Small Businesses

Let’s dive into what you need to know to make smart tax moves and keep more of your hard-earned dollars this season.

How Taxes Work for Investments

When you sell investments like stocks, ETFs, or mutual funds, the IRS expects a share of your profits. These profits are called capital gains, and how much you owe depends on how long you held the asset:

• Short-term gains (held less than a year) are taxed at your regular income tax rate, which could be as high as 37%.

• Long-term gains (held more than a year) are taxed at a much lower rate: 0%, 15%, or 20%, depending on your income bracket.

But that’s not all. Dividends and interest income can also impact your tax bill:

• Qualified dividends are taxed at the lower long-term capital gains rates.

• Non-qualified dividends and interest income are taxed as regular income, which might bump you into a higher tax bracket.

Don’t wait until the last minute—review your portfolio now.

Consider selling underperforming assets to offset gains, a strategy called tax-loss harvesting.

While it sucks acknowledging you picked a losing stock, it’s a great way to reduce your taxable income while rebalancing your investments. I’ve had to take this approach a few times over the years and it helped us get to the $0 tax bill.

Tax-Advantaged Accounts

Tax-advantaged accounts provide powerful ways to save and invest more money while optimizing your tax return.

Here’s how they work:

• Traditional IRAs and 401(k)s: Contributions are tax-deductible, meaning you lower your taxable income today and defer taxes until retirement.

• Roth IRAs and 401(k)s: Contributions are made with after-tax dollars, but the real magic is that withdrawals in retirement are completely tax-free.

• Health Savings Accounts (HSAs): These accounts offer a triple tax advantage: contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. It’s a win-win-win.

I love all the above approach and personally have a 401(k), Roth IRA, and HSA. They are really great ways to spread out your tax liability and optimize your tax investments.

If you’re not sure where to start, I’d recommend contributing to a 401(k) up to your employer match (if your employer offers on), then contribute to a Roth IRA, and finally an HSA. HSAs are particularly interesting and there are a few strategies on how to optimize.

I can cover in a future newsletter if anyone is interested to learn more. :)

Crypto Taxes

Crypto might feel like the Wild West of investing, but the IRS has its sights set on it. If you’ve traded, mined, or even received crypto as a gift, here’s what you need to know:

Taxable Events

Selling crypto, exchanging one token for another, or using crypto to buy goods are all taxable events recognized by the IRS.

For each transaction, you’ll need to calculate the asset’s value at the time of the event and determine how long you held it. If the asset was held for less than a year, it’s taxed as short-term capital gains at your regular income tax rate.

If held for more than a year, it qualifies for the lower long-term capital gains tax rate, which can be significantly more favorable.

Income Reporting

Activities like staking, mining, and airdrops are taxed as ordinary income.

This means the income is subject to your standard tax rate and must be reported in the year it’s earned. The value of any rewards or payouts received must be calculated in U.S. dollars at the time they’re issued.

Proper documentation is crucial to ensure compliance and to avoid any penalties from the IRS.

Staying organized is key. Depending on your level of activity and complexity (ex. simple trading vs participating in a fork), you can simply use a spreadsheet. You can also wait for your exchange to provide year-end tax forms.

If you’re heavy into Crypto, there are a few options for tools. Coinbase should integrate with TurboTax, making it easier to report transactions. I’ve also heard great things about tools like CoinTracker or Koinly. Both of these should track every transaction, from purchases to trades, and make sure you have detailed records.

The IRS has ramped up enforcement, so missing something could cost you.

Review your crypto transactions as soon as possible and ensure everything is accounted for. The earlier you start, the less stressful tax season will be.

Money News  

Here’s a quick roundup of interesting things happening across the markets:

#1: CD Rates are on the decline from their peak in October 2023 (they were just above 6%). The highest rate as of February 3rd was 4.8%. This is still a great rate for a CD, and if you lock it in for long enough, you’ll come out ahead as the Fed acts on future rate cuts.

#2: As of yesterday, the Trump Administration postponed the 25% tariffs on both Mexico and Canada by one month. Both countries agreed to assist in preventing illegal immigration and drug trafficking.

#3: Also as of yesterday…China is striking back against their 10% tariff with their own set of tariffs and an investigation into Google.

#4: Palantir Technologies (PLTR) stock jumped over 20% yesterday after their Q4 beat. The stock hit an all time high and as of this writing, has a 5 year return just north of 1,000%.

#5: Will Nvidia stock split this year? Should you buy it? While I’m personally focusing on index investing, here’s an interesting read about Nvidia specifically.

If you’re looking for additional interesting things to read, below are a few free newsletters I’d recommend. Make sure to confirm your subscription to give them a try.

Outro

I hope you enjoyed our 3-part Tax Series and best of luck this tax season!

I’d love to hear about any wins and I’ll see you on the other side.

See you next week,

The Dollar Dad

P.S. I finally got around to creating a tools page on the blog! I’m keeping a running list of all of the tools I’d recommend to start and grow your business.

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