🤩 Tax Free FIRE
FIRE BTC Issue #18 - A zero-tax FIRE strategy
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I hate taxes. All of them.
Don’t give me your “Who will build the roads?” or “What if your house catches on fire?” or “They protect us from evil people in the world.” excuses…I don’t buy them.
That said, taxes are a reality we have to deal with. Like living in a credit-based fiat financial system, there are ways to use the rules of the tax system to your advantage.
Today’s issue of FIRE BTC is inspired by a reader who recently achieved FIRE and turned me on to an interesting post on X by The Money Cruncher:
X (formerly Twitter)
The Money Cruncher, CPA (@money_cruncher) on X
You could make $150,000/year and pay $0 in taxes.
This is because the tax code is built for investors, not W-2 employees.
Let me explain how it w...
“The tax code is built for investors, not W-2 employees.” This line caught my eye.
Pursuing FIRE means building a savings portfolio to fund your lifestyle once you retire. If the tax code is built for people like us FIRE practitioners, then understanding it can help us reach our goals faster and leave us in a wealthier position.
Money Cruncher’s thread lays out a way to live tax-free up to a certain point, assuming you have stopped working. It leverages the rules around long-term capital gains (LTCG) and the available tax deductions to minimize or even eliminate your federal tax bill.
I’m by no means an expert on tax optimization (or licensed to give tax advice), so make sure you consult with a tax professional on this kind of stuff. OK, here’s how it works…
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🧐 Leveraging the LTCG rules
The tax code encourages long-term investment by providing lower tax rates on long-term gains relative to short-term investments.
Short‑term capital gains are taxed as ordinary income, which means that they follow the regular federal income tax brackets. In other words, if you sell an asset held for one year or less, the profit you make will be added to your other income and taxed at your marginal ordinary income tax rate. The 2025 federal income tax brackets range from 10% to 37% in a graduated manner — highway robbery!!
Luckily, by the time you reach FIRE, your savings portfolio will consist of investments held for more than one year, which benefit from a more favorable tax treatment. When you sell an investment that you’ve held for more than one year, the gains are taxed at special long-term capital gains rates of 0%, 15%, or 20% depending on your taxable income.
That last bit is important.
You may have built your savings portfolio through W-2 wages, which are subject to ordinary income tax rates (10% - 37%) like short-term capital gains highlighted above, plus payroll taxes for Social Security and Medicare. However, if you reach your FIRE goal and stop working, that W-2 income goes away, and you’ll be living off your savings portfolio that is filled with investments that are only subject to long-term capital gains.
When those long-term investments are sold, their realized gains contribute to your income. This is where the special tax brackets for LTCG kick in.
For 2025, the 0% LTCG tax bracket applies to taxable incomes up to approximately $48,350 (single filers) and $96,700 (married filing jointly).
Even better, you can subtract the standard deduction ($15,000 for singles and $30,000 for joint filers) before taxable income is calculated. This means you could realize up to $125,000 in capital gains and still owe zero federal tax after deductions.
This doesn’t include income you may also have from Roth tax-advantaged accounts, which are not subject to taxes upon qualified withdrawal.
BONUS: If you live in a no-income-tax state such as Florida, Texas, or Wyoming, you could potentially pay zero in both federal and state taxes on your investment income!
📝 Things to Keep in Mind
🔸Dividends count as income – If you hold stock index funds or other investments that throw off dividends, those dividend payments are included in your income calculation. Of course, bitcoin doesn’t produce dividends.
🔸Beware of tax law changes – Some provisions, such as those from the 2017 Tax Cuts and Jobs Act, expire after 2025, potentially altering tax brackets and deductions. The tax laws can change over time, so it’s important to stay abreast of how the landscape shifts.
🔸Consider state taxes – If you live in a state with income taxes, this strategy may still save you money, but it won’t be completely tax-free.
🔸$125k may not be enough for you – Those of us who take a “fat FIRE” view of the world may plan to spend more than $125k each year. In that case, the 15% or 20% LTCG tax brackets may apply to excess income above $125k.
This type of in-the-weeds, technical approach to managing finances is not something I normally focus on. I’m a big-picture kind of guy, and I prefer to focus on letting an excess of wealth enable the lifestyle I want instead of operating in a perfectly optimal manner.
A lot of FIRE practitioners take a different view, and they love finding loopholes and optimizations with this kind of stuff, whether it’s related to taxes, credit card points, etc.
Regardless, the ability to live off capital gains instead of wages is right down the middle for those pursuing FIRE, so we should understand it and take advantage of the rules.
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Thanks for reading! 🙏
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