What do you get when two senators — one each from the left and right — and a fabled tech billionaire put their heads together? Answer: a federal tax-reduction initiative called the Investing in Opportunity Act, which could go a long way in improving underdeveloped areas, while also providing an incredible tax break for cryptocurrency investors.
Investing In Opportunity Act: The Basics
Who: Senators Timothy Scott (R-SC) and Cory Booker (D-NJ) joined forces with renowned tech luminary Sean Parker — a guiding force behind Napster, Facebook, Spotify, etc. — and a collection of small-town mayors.
What: The Investing in Opportunity Act, a program intended to transform economically depressed regions — both urban and rural. Under the law, taxpayers can invest capital gains into “Opportunity Zones,” in exchange for tax deductions. The capital gain has to be paid in 2026, unless congress extends this date, however, you will be eligible for reductions in your capital gain if you hold the investment property beyond five years.
When: Lawmakers incorporated the majority of the bill into the Tax Cuts and Jobs Act of 2017.
How: The Investing in Opportunity Act, at its core, is an investment-incentive initiative wherein financiers enjoy significant tax breaks in exchange for capital injections into struggling regions. Backers envision abandoned schools and factories transforming into neighborhood-reviving tech and business incubators.
Here’s how it could work:
- You sell $110,000 of BTC in 2018 which had a cost basis of $10,000. Thus, you have a capital gain of $100,000.
- You invest the $100,000 in a business in an opportunity zone.
- You are eligible for a $100,000 deduction against the $100,000 of capital gain. Thus, you do not pay any capital gains for 2018.
- When you sell the business, you will report a capital gain, but it will decrease over time. If you hold the business for at least 5 years, your basis increases 10%. After 7 years, another 5% for a total reduction of 15%.
- The $85,000 capital gain is due in 2026 if you have not yet sold the business, unless extended by congress.
Where: States across the US have designated up to 25% of their regions as Opportunity Zones.
Investing in Opportunity Act: The Incredible Potential
Scott, Booker, and Parker believe the program will electro-shock neighborhoods in cardiac arrest, while simultaneously providing a compliant tax-avoidance opportunity to investors with sideline capital. Parker elaborated:
“The incentive needs to be powerful enough that it can unlock large amounts of capital, aggregate that capital into funds and force the funds to invest in distressed areas. Instead of having government hand out pools of taxpayer dollars, you have savvy investors directing money into projects they think will succeed.
“People were sitting on large capital gains with low basis and huge appreciation. There was all this money sitting on the sidelines. I started thinking, How do we get investors to put money into places where they wouldn’t normally invest?”
Similarly, Cory Booker theorized:
“If we can get the trillions of dollars of capital off the sidelines and get the best investment minds coming into our communities, we can end up creating jobs and opportunity.”
Investing in Opportunity Act: A Crypto Tax Strategy
Although like kind exchanges — aka 1031 exchanges — are no longer possible for cryptocurrency transactions in 2018 and later, the Investing in Opportunity Act provides an excellent way for taxpayers to diversify their assets and achieve tax deferral. Further, holding businesses or property in Opportunity Zones translates into a reduction in capital gains and taxes. In other words: Opportunity Zones are a very attractive option for crypto investors.
Investing in Opportunity Act: The Devastating Risk
On paper, the Investing in Opportunity Act seems perfect. But looks, as we know, can be deceiving. Social science experts warn of the measure’s capacity to exacerbate already tenuous class divides. A wrong turn could result in mass gentrification and population displacement, which increases domestic instability.
Proponents, however, say they’ve gamed out potential pitfalls and have solutions; namely: impact investors that will offer “cheap renovation loans” and “subsidized mortgages” to prevent people from being priced out. Plus, argue the backers, local governments can use the new payroll and property taxes for infrastructure improvements and service enhancements.
Can Investing in Opportunity Act Options Enhance Your Portfolio? Let’s Talk.
The Investing in Opportunity Act may be an ideal option for ethical investors looking to work their sideline money for good. If you’re interested in exploring how Investment in Opportunity Act possibilities could lower your taxes and potentially augment your bottom line, then get in touch. We’ll assess your situation and walk through options. Get in touch with our cryptocurrency legal team today.