With cryptocurrency making headlines almost daily, it’s no surprise that many investors are considering adding it to their portfolio. Digital currency has become more appealing to investors looking to diversify their portfolios.
Since its launch in 2009, cryptocurrency has experienced meteoric rises and staggering drops in value. However, despite its current rise in popularity, investors must remember that it can present its own set of challenges.
So if you are considering investing in crypto, it’s important to gather as much information and context as possible.
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Who could benefit from investing in crypto?
Before you start investing in crypto, you need to consider your age. Depending on how close or far away you are from retirement will change the amount of assets you risk putting into crypto.
The younger you are, the more risk you may be able to take. This is because you have time on your side to make up for any potential losses. If you are getting close to retirement, you don’t have as much time to make up for any investment mistakes.
Because cryptocurrency is still a fairly new investment, it can be pretty unstable, meaning it’s not uncommon for drastic price changes to happen very quickly.
However, if you are a risk-tolerant investor, crypto could be a good avenue for your money. This is because you are more comfortable with short-term volatility for the possibility of high returns.
If you are an investor who wants to put their money somewhere that isn't controlled by a single government or bank, crypto is a good choice. Cryptocurrencies are decentralized finance or DeFi, which means people using it can send, purchase and exchange assets without relying on third parties.
Many investors are looking for faster ways to make transactions, and DeFi allows them to make direct peer-to-peer transactions.
How do taxes work with crypto?
As you should do with any of your investments, you need to understand how taxes could impact your crypto investment.
In the United States, the IRS doesn’t see crypto as a true currency yet and will treat that asset as property. This means that if you buy or sell cryptocurrency, it will count as a taxable event.
If you have owned the asset for less than a year and sell it, those profits will be considered short-term capital gains and you will be taxed at your normal income rate.
On the other hand, if you have had the cryptocurrency for more than a year when you decide to sell, profits are considered a long-term gain and will be subject to long-term capital gains tax rates.
If you are simply buying and owning crypto without moving it, then it is not taxable.
Transferring crypto between your accounts is also not taxable.
If you invest in crypto and wish to sell it for cash at a later date, you will owe taxes if you sell it for more than you paid. If you sell at a loss, you may be able to write them off to help offset gains and reduce your taxable income.
What does the future of crypto look like?
Many investors believe that the global cryptocurrency market will more than triple by the year 2030. However, the future of crypto depends on a few different factors that investors should pay close attention to.
First, what will the regulations around crypto be in the United States and around the world? The best-case scenario would be for universal worldwide regulations. That seems unlikely to happen soon because countries view crypto very differently.
The United States may have a better regulatory outlook than some other nations given a president and administration that has been outspoken in promoting the advancement of crypto.
Another thing to consider is whether more institutions will integrate crypto into their payment systems. Will there be a mass-market adoption in the future or will the rollout be slower? This could influence whether people consider adding crypto to their portfolios.
It may still be a relatively new investment avenue, but I tell my clients that crypto will continue to become a more common investment option and they should start considering it. While the exact future of cryptocurrency is still uncertain, it isn’t going anywhere.
If you are interested in crypto, do your homework and meet with a financial professional who understands the risks and rewards of this new investment avenue.
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