Opinion: Before you buy bitcoin, answer these 4 overlooked yet crucial questions

Crypto is the talk of the town. Bitcoin, ethereum and others seem like an exciting way of making money. Only after selling are many aware they owe income taxes – but that’s not the only crypto information they are missing.

Crypto does not typically align with the rest of someone’s portfolio or financial planning. Before purchasing, be sure to understand these four factors:

Investment strategy: How does cryptocurrency fit with your investment strategy? Many people jumped on board as a “sure bet.” The investment becomes an emotional decision, which is not a sound way to make investments.

There are investment reasons to pause and rethink. Consider your risk tolerance; if you have always been a conservative investor, adding crypto to your portfolio is very risky. Knowing how this fits into your overall plan can be the difference between a rational decision and a reactionary one on the day your cryptocurrency plunges in value.

If you do have an investment adviser, make them aware you own crypto. When you hired them, you filled out an investment profile as required by the Securities and Exchange Commission. With this addition to your portfolio, they may ask you to adapt your profile or make the investments they manage safer to offset the added risk you are taking on.

Estate planning: How does crypto fit with your estate plan, practically and legally? Many people with crypto investments never provide the details, including passwords, to their family or loved ones. Lacking this information, the asset could be lost to the digital world on disability or death no matter how much it is worth. Be practical. Share the details.

Legally, your account is part of your estate plan. If your lawyer has created a trust for you (or you and your spouse) and has suggested everything you own go into the trust, then a crypto account may wreak havoc when it comes time to settle the estate unless it is also in the trust.

When you set up your crypto account online, the system is easy, smooth and quick. What it is not personalized. No prompt asks if you have a trust or a specific designation to align with your estate plan. Instead, accounts are usually set up in your name.

As a result, no matter what the account’s value, it will have to go through probate, increasing the time and costs to settle your estate, even if you have a trust. In addition, if your legal documents do not grant authority to your executor to handle your digital assets, your heirs could be facing an unnecessary hassle with the crypto provider.

Read: Your estate plan might be outdated because it excludes digital assets

Addition: Your financial power of attorney may fail you when you need it most

Risk: Are you really prepared for the wild swings in this investment, swings that are bigger than you see in the S&P 500 index SPX,
-1.48%
? Bitcoin BTCUSD,
-0.48%,
for example, has traded as high as $ 68,989 and as low as $ 28,833 in the past 52 weeks, and it’s now trading just above $ 40,000. Creating an exit strategy as far as timing and / or value is a smart investing approach.

What is the right amount of crypto to keep on hand? This is taking on risk that may be offset by other factors in your financial life. Everyone’s situation is different, but you still need cash on hand. Cash in the bank may not earn much, but it is has Federal Deposit Insurance Corp. backing. Even your investments in brokerage firms are insured up to limits; Securities Investor Protection Corp. insurance covers you if the company, not your investment, goes under. There is no such assurance from Coinbase or Gemini.

Using your emergency cash to buy crypto is shortsighted if your security account is not strong. Consider cryptocurrency within the whole picture of your financial life to know what suits your goals and cash flow.

Read: When is it worth hiring someone to manage your money?

Fees: Are you following the tax rules? And whether it is cryptocurrency or stocks under your control, are you keeping cash available for taxes when you sell?

If you have done any selling of crypto the past few years, your CPA may have asked you whether you sold any cryptocurrency, and now it appears on the 1040 form. Starting in 2023, crypto sellers will be required to issue 1099 tax forms. Keeping records and planning for taxes are essential.

Read: Did you invest in crypto last year? Make sure you answer these 3 questions before filing your taxes

As an experienced investor, taxes should come as no surprise. Still, you don’t want to have to sell crypto to pay the taxes, thereby creating a cycle of more sales and more taxes.

The changes we have seen about reporting crypto gains and losses are just the beginning. For most investments, the wash sale rule applies, which means when you sell an investment and buy it back within 30 days, the IRS does not allow you to claim a deduction. This rule doesn’t yet apply to crypto, but watch for possible rule changes in 2022 that could include making crypto investments subject to the same rules on wash sales as other investments.

CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at MoneyPeace.

More from MarketWatch

How young, everyday investors convinced a top billionaire dealmaker to join them as a crypto bull

Will the crypto market always follow bitcoin’s price lead? It may not be in the future, this asset manager explains.

Yellen warns crypto invites risks that could ‘disrupt the financial system and our economy’ in first major speech on digital assets

.

Leave a Comment

%d bloggers like this: