QOFs: A flexible vehicle for preserving cryptocurrency gains


Visionary fund, revolutionary tax break

If you’re an investor looking for an edge, then you know one of the most significant tax code changes in recent history introduced us to qualified opportunity zones. But have you drawn the connection between QOZs to the capital gains benefits regarding your cryptocurrencies?

Let’s take a step back. QOZs are special census tracts that state and federal governments have targeted for economic development. These neighborhoods, in turn, have unlocked a new type of investment vehicle called Qualified Opportunity Zone Funds (QOFs). These investment vehicles allow people to invest in real estate located in QOZs, businesses, and stock.

And these funds offer investors significant growth opportunities paired with never before offered capital gains tax advantages.

What’s so revolutionary is that, thanks to QOFs, for the first time ever investors can now defer, reduce, and eventually eliminate capital gains taxes by reinvesting earnings from any venture into another investment vehicle. That’s right – holding the fund for ten years means paying zero capital gains taxes on the exit from the fund.

Your cryptocurrency move is already here

Not surprisingly then, QOZs and QOFs are a great fit for many investors, investment styles, and portfolio needs – including cryptocurrency investors. However, with rules constantly changing in this volatile world, many of them don’t yet realize the opportunity right in front of them.

1031 (like-kind) exchanges are often used to protect capital gains from taxation, but since November 2018, the IRS has made changes to 1031 exchanges that make them significantly less attractive to investors.1 The cryptocurrency world is one place 1031 exchange rule changes have left people reeling.

Just as crypto investors were getting their bearings, they were hit with a curveball: 2018 was the last tax year when they could do like-for-like digital token swaps to avoid taxes on their (sometimes very sizable) profits. Since then, 1031 exchanges have been restricted to like-for-like exchanges of real property — generally meaning real estate.

With those limitations, investors have been looking for new tax-advantaged vehicles where they can place their hard-earned gains. Qualified opportunity funds offer a great deal of flexibility over other kinds of tax deferral.

“What makes the opportunity zones attractive is that investors can take back the money they initially put into any investment [...] or even some portion of the gains.”

- Paul Sullivan, New York Times2

Qualified opportunity funds to the rescue

QOFs are incredibly attractive because any capital gains from any venture can be rolled in: from businesses, cars, and real estate, to cryptocurrency, gold, and any other asset whose profits would bring the tax man calling. And when you initially invest in a QOF, you get more flexibility.

Now you can roll in just your gains, or your gains and principal.

“The tax benefits conferred by OZ funds present an incredibly attractive option for accredited investors who are seeking to build exposure to professionally-managed real estate as an asset class.”

- Anthony Dagati, Managing Director, M31 Capital


From the lack of restrictions to flexibility in asset types, asset diversification to tax reductions, the Morpheus 1 QOF offers a range of advantages to the serious investor when compared with 1031 exchanges.

*Invest by December 31, 2019 for the maximum tax reduction benefit.

“By investing in real estate, startups or other operating businesses [in QOZs], cryptocurrency investors can put tax dollars to work in new investments, maximizing the potential returns while enjoying a deferral of the underlying tax liability.”

- Ryan C. Brunton, Partner, Husch Blackwell 3

Are you ready to reap the benefits of QOFs?

Given their flexibility, versatility, and significant tax advantages, many different kinds of investors are already in on QOFs. As we’ve pointed out, cryptocurrency investors are already reaping the benefits.

Cryptocurrency investors

  • Deferrals to simplify tax time

  • Reduces taxes on crypto profits

  • Built-in diversification and risk-reduction

Cryptocurrency investors have faced an increasing amount of tax scrutiny in the last few years. While some were able to previously use like-kind exchanges for token-sales by claiming a like-for-like exchange of one token for another, that’s no longer possible with the IRS’s limitation of 1031 exchanges to real property.

In light of this, crypto investors have limited options for protecting capital gains.

At M31 Capital, we believe the same eye for the cutting-edge that drew in cryptocurrency investors will recognize the considerable capital gains tax advantages of QOFs. Flexibility, diversity, risk-reduction: when properly managed, these funds offer growth opportunities for both one’s portfolio and the communities targeted for economic development.



[1] https://www.irs.gov/newsroom/like-kind-exchanges-now-limited-to-real-property 
[2] https://www.nytimes.com/2018/11/09/your-money/tax-breaks-opportunity-zones-investment.html
[3] http://ozexpo.com/posts/why-opportunity-zones-is-a-big-change-for-cryptocurrency-investors/