The Bright Side of Inflation: Tax Breaks

With inflation on the rise, Americans — the ultra-wealthy, especially — may see new tax breaks in 2023, thanks to adjustments from the IRS.

The IRS opted to increase the estate-tax exclusion by $860,000 in 2023, meaning heirs can now inherit $12.9 million without paying a federal tax bill, Howard Hook, principal and senior wealth adviser at EKS Associates, said. Married couples can jointly inherit double, making their tax-free estate limit nearly $26 million. 

The arrangement could have substantial implications for those willing large amounts of cryptocurrency to their descendants. 

Marginal federal income tax brackets have also increased 7%. The lowest tax rate, 10%, now kicks in for individuals with an income of $11,000 in 2023, up from $10,275 in 2022. Taxpayers with an income of $231,250 or more are now in the 35% bracket, which previously started at $215,951. 

“All the above changes are positive for people,” Hook said. “The likelihood, however, is that inflation is still having a net negative impact on most people’s finances.” 

Capital gains taxes, which caught many crypto traders by surprise in the 2022 tax season, have also been impacted by inflation. 

“The nature of increasing the thresholds means more cash in investors’ bank accounts,” Gabriel Brin, vice president of tax and accounting at Ledgible, said. “This has the positive impact of increasing an investor’s purchasing budget of cryptocurrencies for 2023 in comparison to 2022.” 

Single filers making $44,625 or less annually can now likely qualify for 0% capital gains tax on investments held for one year or longer. In 2022, single filers had to make $41,675 or less to qualify for 0%. Americans making $492,300 or less now fall into the 15% long-term capital gains bracket for 2023, up from $459,750 in 2022. 

“Investors may be more inclined to take profit on positions whether it be for short term or long term holdings,” Brin said. “An increased income and capital gain threshold means more room to trigger a taxable event while sitting in the same tax bracket. This may drive investors to submit sell orders for holdings that have been held long term while waiting for an opportune time to recognize their gain.”

The changes come as the IRS prepares to fight more cryptocurrency-related cases in the upcoming tax year, according to Kim Lee, head of criminal investigations at the agency. The division is currently building “hundreds” of cases involving digital assets tax issues, Lee said. 

As traders stay on alert for future enforcement actions and lawsuits, one of the most high-profile cryptocurrency tax cases was dismissed in October when a federal judge ruled the issue moot. 

A Nashville couple moved to sue the IRS even after they were issued a refund for taxes paid on unrealized staking gains. The crypto community had hoped moving the case forward in court would create a precedent for how staking rewards are treated in the future. 

Without a court ruling, it is unclear how staking rewards may be taxed in the 2023 season, crypto accountants say, but maintaining a record of trades and taxable events will be increasingly important.

---

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.