Apr 01 2022

Wealthbuilder Series: Boost Your Investing Strategy in Volatile Markets: Stocks, Crypto and Taxes

This past year we saw over 20 million new investors enter the crypto marketplace to reap the rewards of this new hot commodity. Understanding crypto and how it works can be challenging enough, however grasping the tax implications of your new crypto investments can be even more confusing and frustrating. To help you navigate these new regulations and avoid making costly tax mistakes, watch as Jeff George, CFA, CEPA, an expert financial advisor on the Wealthramp Network sits down with our founder Pam Krueger to discuss strategy around crypto investments and how that relates to the rest of your investment portfolio and taxes.

Discussion Recording Transcript

Pam Krueger:

Hi, everybody. Welcome to our Wealthbuilder Series. We are going to cover some things that are pretty exciting today. And for those of you who don't know, I'm Pam Krueger. I am the founder and the CEO of Wealthramp and also the co-host of Friends Talk Money. It's a podcast on PBS Next Avenue.

Now, for anybody who doesn't know, Wealthramp is where you go when you're looking for the right fiduciary financial advisor. These are advisors who work only and directly for you. They don't work as sales reps for brokerage firms or insurance companies. And that means the advice you get is straight from the decision-makers.

So, Wealthramp is the go-to resource, and we are the only platform that will connect you with vetted, fiduciary fee-only advisors, where we don't share your information, not even with the advisors, until you tell us that you are ready to talk to that advisor. So, we're going to dive in.

Today, we want to continue helping you, not only sail through tax season, but also take things in context with your overall investment strategy, especially if you've been one of the millions of people to invest and decide to get involved with crypto or Bitcoin or any kind of crypto investments or assets of any kind. There are literally 20 million people who are investing in crypto now in the marketplace, as a whole, for crypto assets, is now beyond $2 trillion.

So, it's not like anybody has been doing this forever, but we're going to help you understand, especially knowing that we're going into tax season, what to do and what not to do, as far as your taxes. So, we're talking investments, and we're talking strategy, specifically around crypto, and how that relates to the rest of your investment portfolio and taxes. So, we're going to dive in because you guys have asked me on many occasions, "We want to hear from your advisors directly, Pam." And I hear that.

So, that's why today I've asked Jeff George. He's our guest expert for today because Jeff's a chartered financial analyst who advises individual investors, and especially entrepreneurs and small business owners.

Before founding Tao, which is his firm, Jeff was advising on $2 billion in corporate and retirement plan assets, such as 401(k)s and pension plans. So, we have our own chef in the kitchen, our own chief investment officer and advisor right here.

So, Jeff, I'm really happy that you could join us today. Thanks. Hi.

Jeff George:

Hi. Yeah, thank you. I'm flattered, and good to be here.

Pam Krueger:

Let's kind of set the stage. A lot of us own stocks, of course. Some people have become owners, especially as 2021 was a record year for a lot of cryptocurrencies. So, a lot of people decided to jump in, and they do it in different ways, for different reasons. Some are buyers, like myself, who look at the investment as long term, and others are in and out, and in and out.

So, as we've been watching these assets go on this big rollercoaster ride, especially in light of world events and all of that, higher inflation, higher interest rates, knowingly don't know how crypto assets will ever behave, as a hedge, in terms of a portfolio.

How do you see these world events, geopolitical events of late, impacting the entire crypto market? And maybe just the overall way that you look at portfolios that include crypto assets?

Jeff George:

I mean, you could look at it from a couple perspectives. So, one would be the ... for just purely from an investment risk standpoint. And what we saw back in, really over the last couple months, is that crypto is not yet defined itself as ... So, it's operated pretty well as an inflation hedge, what we've seen so far. We don't know that for sure, indefinitely, but it has developed a relatively high correlation to tech stocks. And I think that is, in a sense, reflective of who's been investing in crypto because it is more of a speculative mindset of, "I'm willing to take this risk. I want to get a larger return." So, there may be some underlying similarities, based on the kind of investor base that has participated up until this point.

But if we see more market volatility, crypto's probably going to be trading in line. It might behave somewhat differently, but it could very well continue behaving somewhat like tech stocks. So, it behaves well as an inflation hedge and does have different properties, but really the market has to mature to see what it does next, based on who the new participants are.

So, I think as we get more institutional buyers, which we're starting to see, as we start to see more Mom-and-Pops, long-term investors like yourself, Pam, that are seeing it more as a diversifier in their portfolio, it may become more so.

The geopolitical science is really interesting because I was just reflecting on this with a friend of mine, but the ... probably one of the biggest risks that we see, or that I see, with cryptocurrency is regulatory risk. So, what are the governments of the world going to do if they perceive cryptocurrency as a conduit for capital flight? As you see countries going away from a globalized system to possibly a multi-polar or decentralized system, the countries are going to have a natural incentive to keep capital locked within the country.

And, very likely, regulations will be coming out at some point in the future if it continues, in a not so friendly fashion with Russia and other countries, that they're going to start seeing this as a threat to their domestic economy, to their capital safety or their country's solvency.

And, so, you very well could see regulations coming out that are going after exchanges that aren't implementing [inaudible] client rules, that aren't providing the necessary reporting to the regulators, to the IRS. And, so, it is very important that investors understand where they're accessing these markets.

Pam Krueger:

Yeah. Because if there are restrictions and there are more regulations, which seem kind of the natural evolution, then, for you, with clients who have maybe a small, infinitesimally small, like when I speak about myself as an investor, that I'm not going to paint myself as a crypto investor. This is me just basically wanting to own a tiny bit, so maybe 1% of the value of my entire portfolio.

I might be willing to say, "I really believe in this," and so forth, but with more restriction possibilities, then what do you see for clients who are serious crypto investors? And what does that mean for you, as far as positioning for that? Does that make you reset your strategy today? Or does that make you just say, "These are the things that I want to be aware of. We don't know the impact yet." How do you prepare for what you see coming next?

Jeff George:

Firstly, I'll say it depends on the investor. So, for the DIYers, that I do have some clients that have that approach, I tend to focus more on just educating them about what the risks are, kind of helping them to understand that, "Yeah, maybe you've gotten away with buying and selling these cryptos, and you haven't reported anything to the IRS. I can't help with that. You need to basically talk to your CPA and start reporting these things because you don't want it to come out many years later that this information was known, and you didn't provide it. And, by the way, you owe these taxes and plus a couple years' worth of penalties."

The premise that it's attractive purely from a "Nobody gets to know what I'm doing standpoint," that's not going to last forever because anything that removes the government's ability to prohibit money laundering or anything like that, is going to eventually fall under scrutiny.

Seeing it as a diversifier, though, as an opportunity to add different types of risk into a portfolio, I don't think that that's necessarily going anywhere. I think that that's probably going to go the opposite direction. We now have two closed-ended funds that I know of, probably even more, that are diversified, index-like strategies to invest in cryptocurrency. We're going to see more of those. And I think that fee compression and those strategies are going to really make it to where they're more affordable right now. It's like two, two-and-a-half per cent. That's pretty high.

But as we get a Fidelity or a Vanguard or Schwab, or some of these other major players that realize, Okay, they're going to be able to do it much more efficiently. And I think that that's going to make it to where you can have that type of diversification instead of a traditional investment portfolio, in a more cost-effective way. So, in that sense, I think it's really a good thing.

Pam Krueger:

I would never think of my Bitcoin and Ethereum as being a hedge against inflation, knowing that we've got these brand new headwinds of rising interest rates, at the same time, just in inflation that just won't stop.

And looking at inflation, like you said, it could be inflation. It could be, it could be, that crypto works as an inflation hedge, but not to be confused with a market strategy hedge against stock market drops.

People think of gold, and they think of hard assets, real estate. They think, "Oh, I want to run into hard assets when the stock market drops," because that really is not a good feeling.

So, in this case, for me, anyway, and I'm wondering how you see this, I don't see crypto as the be-all, end-all answer for the hedge when the market falls.

Jeff George:

No, no, no, no, no, no. It very likely could be the opposite, at least in the interim.

Long term, it will behave differently over time. We can get into some of that if you're curious, but in the interest of answering your specific question, what's really kind of been the prevailing thought among many experts that I follow has been that Bitcoin has now kind of positioned itself, at least more recently, as the risk-on inflation hedge. Whereas, gold, the traditional hard assets, are the risk-of inflation hedge.

So, if you see a market decline, and you're dealing with inflation, well, then you want something tangible that you can hold onto.

Pam Krueger:

That's the gold.

Jeff George:


Pam Krueger:

And that's the stock market hedge, but the other risk of-

Jeff George:

Or commodity-

Pam Krueger:

... of inflation-

Jeff George:

... things like that. Yeah.

Pam Krueger:

Right. Right. But crypto, not being a hard asset, isn't categorized that way. But, in your mind, you think of it, as far as the experience goes that we have so far. Right? I mean none of us have been doing this for 20 years.

Jeff George:

Yeah. It's parity. Right? So, I guess it depends on what kind of inflation you're talking about. If it's demand-side inflation, which is not really what ... This is only ... We've only seen this really since '20, '21. Demand-side inflation, you'd look at hard assets and say, "Well, I want something that's tangible that's going to retain value because other people are going to want it just as much as I already want it, and then I already have it."

If you're looking at it from a monetary expansion standpoint, so if we keep seeing the Fed printing significant funds over time, well then, all, of a sudden, maybe cryptocurrency can be an inflation hedge because you're effectively seeing dollar debasement, and investors looking at it from the outside are going to go, "Well, then kind of what's the difference? If crypto is going to go up at the same rate or faster, then the value of my dollar is declining.

Pam Krueger:

It's just another tool on the shelf. And I mean, this is not an area that ... There are experts who, even the most expert of experts, of which you are an expert in crypto, and I am not, but we're all on a learning curve together.

Now, what makes things even more complex, in addition to geopolitical and all the inflation that we're seeing and so forth in the economy, and all of these things are things we cannot control, but what we can control is making sure that we don't get flagged by the IRS, as we sail into tax season here. And if you bought, if you traded, if you sold any cryptocurrencies whatsoever, Jeff, what do we absolutely need to know about taxes on crypto assets?

Jeff George:

The best guidance that I've heard and what the IRS has released up until this point in time, says cryptocurrency is property. So, now, understanding that there is a difference between property and security. And it's mainly regulatory at this point, but it's property, which means if you buy and sell it, you can have a long-term or short-term capital gain. If you receive it in compensation in any way, that's income. When you later sell it, you then potentially also have a capital gain.

So, when we issued our article we had talked about recently, we talked about the potential for a Wash-Sale Rule. So, that's something that has now been put out in the Infrastructure Bill as a proposal, and it's something that's being given significantly more interest by Congress and various lawmakers.

So, as early as this year, we could see the implementation of a Wash-Sale Rule for cryptocurrencies, that people who previously would've been able to do tax-loss harvesting are not going to have that option, and those losses may actually be disallowed in the future.

So, it's a rapidly changing regulatory framework. And even just from one year to the next, people who are actively engaging in trading and investing in cryptocurrency need to be aware that those rules are not static. They are under development. They're constantly under development-

Pam Krueger:

Because it is ever-changing. It is so dynamic. I would say, what I've been reading and what you're saying is, there's general guidance that surrounds stocks and investments in property when it comes to the IRS. It feels like, so far, those same baseline ground rules apply to crypto. But I think that in the reporting, there's language that says, "Did you receive crypto?"

Now, I hate forms. I am form-phobic. I freeze up. And I look at that, and I say, "Well, wait a minute. Did I receive it?"

So, I think that one thing that could be clarified for the general guidelines is, it's ... And you tell me if I'm right. If I bought crypto with my own money, with dollars, didn't trade it, didn't get it from mining it or earning it another way, then I don't have to report it. Is that correct? If I'm just an investor, who's bought it with my own dollars.

So, when that question comes up on the forum, that says, "Did you receive crypto?" It's like, "I did, but I bought it." So, is that a distinction that should be-

Jeff George:

I think it probably would qualify as a yes. Now, if it were me, I would check the box, yes. And it may not have created a taxable income. So, it may not be something where you actually have income from it, but you took possession of crypto and, in my mind, you're not going to hurt yourself by checking that box, if you can demonstrate that you had no income from sale. And, ultimately, you're going to have to check the box whenever you end up selling it or if you ever end up staking it and collecting income from it, because all of those things are going to build on that initial checkbox selection.

In my mind you might just do it. If you own it, you might as well check it because it's going to affect you in some ways.

Pam Krueger:

Okay. Okay. So, when it comes to the reporting of it, let's be really clear. Go ahead and be transparent and report it and err to that side. Because, if you don't, I was reading some articles from the IRS about using the word, like tax, using the phrase tax fraud and those kinds of punishable offenses that I don't want to be involved in. So, I think a lot of people know that, but let's talk about other crypto taxable situations.

Just kind of run me through the things that you see with your clients that you're saying, "Ah. Flag this. Flag that. Make sure."

Jeff George:

Yeah. So, staking is one that is becoming more and more popular, and that's ... It's interesting because, having come from the finance industry, you see some of the ways that these transactions are taking place, and you go, "Well, that's not ... really not that much different than, say, securities lending," or ... So, there's parallels. And, in this case, it's you're collecting interest in the form of more crypto. So, in that sense, you would ... It'd be the same as if you received a payment in crypto.

Pam Krueger:

Let's take it apart just for a quick second. I mentioned the word mining, which is kind of a way of earning a Bitcoin, but what about staking? Can you just go back and rollback for a second? Just kind of define what we mean by staking?

Jeff George:

Effectively, what someone's doing when they're staking, is they're taking cryptocurrency that is theirs. They own it. And they are placing it as collateral, effectively, to then collect interest. And that's why I had joked it's a little bit similar to securities lending.

So, if you own a portfolio of stocks, and you say, "Well, I've got a bunch of Tesla, and somebody wants to borrow my Tesla to short the market, I can lend them my Tesla to short the market, and I collect an interest rate on that."

It's a very similar idea, at least, that you're providing what you own for a period of time. You're basically locking it in, to where you would neither sell it or move it anyway. And, in exchange, you receive a rate of interest. That rate of interest is what they're referring to as staking. But the difference is, instead of receiving cash compensation, you're receiving tokens as compensation.

Pam Krueger:

So, not reporting any of these to the IRS is a huge no-no. How do you report that on the tax form?

Jeff George:

It would be ordinary income. And then at some point, when you choose to sell it later on, it would be a gain. And if you're smart about it, you're going to start tracking your tax losses ... or tax lots. I apologize. So that when you end up reporting that, you can actually break down which lots they are, and you may have some discretion over which ones you sell.

Pam Krueger:

Okay. So, clearly, any transactions that you're making, buying, owning, investing, trading, selling, staking, mining, report it. Err to the side, because non-compliance is not going to end well. So, okay.

And, obviously, this stuff gets really complex, really fast. So, I'm just trying to stick with what people kind of need to know for this tax season and just kind of understanding, and people know why they're investing or why they're ... Well, maybe some people don't know. They just want to be in it because it's fun to be in it. I mean, I actually have to admit, I probably put myself in that category a little bit.

So, as far as help that's out there and some of the online tools that are out there that you have used, or that you see the DIY investors using, what's out there that can help people make sense of all this?

Jeff George:

Yeah. So, two, in particular, that I've seen and seem to be nice products. There's one that's ... It's cryptotrader.tax. That's one service out there. But another, I think, is in Ledger, and there's more now. I mean, there's a handful of them, but effectively what they do is they let you, in a mint-like fashion, link up your crypto accounts to a service that helps you to track your lots.

So, if you're holding a variety of cryptocurrency positions, you've bought and sold them throughout the years, you get to effectively know, "Well, what are my tax lots? When did I buy this? Is this a short-term gain? Is this a long-term gain? Short-term loss? Long-term loss?" It helps you with netting out trades, things of that, that ultimately your CPA will need, or if you're preparing your own tax return, you're going to need to report to the IRS.

And, so, that really helps to simplify that process. And it helps to provide some insight, for those that do want to engage in tax-loss harvesting in some way.

Pam Krueger:

Okay. But then are the shortfalls? Because every time I vet an online tool, I always make a list of, "Okay, these are the things that I know that work really well and really fast and efficiently to help me, especially in this case where crypto kind of figures things out."

And then there are other things that these services and online exchanges don't provide. How much can we rely on, and where do we not want to get caught, relying or depending upon those tools or those exchanges for reliable information, especially for taxes?

Jeff George:

Sure. So, they're not a substitute for tax advice. So, it is a means to an end. It might help to save your accountant some time. The way they present that information may not be what they would recommend for you. It's going to present a user with a lot of options for how they can report their taxes. It's not necessarily going to tell them what the most advantageous way to do it is, based on their circumstances.

And also, I would say that the further you get out into the fringe, so if you're self-custodying your own currency, and you're working on a decentralized exchange, or you're operating in some pretty far-out method of applying the cryptocurrency investing, for a lot of ordinary traders, or not ordinary, but traders that are more used to the exchanges, you may not have the resources to connect your portfolios or your wallet with a tool like this. And it really does fall on you to understand how all of that works.

Pam Krueger:

I always think of it as wanting to hit the help button right when they need it. And they really need to go beyond what's available, either the information through the exchange, what they provide and rely on that, or whether it be some kind of online organizing tool.

What if they need real help and real advice? The question is, that we've got taxes, combined with investment strategy advice. I don't feel comfortable. Don't tell my CPA. He's a good friend. I don't feel comfortable taking my entire portfolio, with all my tax questions, especially around crypto, and dumping them on his desk.

So, where do people turn to find this really unique combination of expertise? And second, part B, to that question is, give me an example of what you do with your clients who come in, who have crypto? Just give me a quick, real-life example of a real client. But where do people go when they need the tax and the investment advice?

Jeff George:

So, I've got CPAs I work with that will ... that are really digging into this and getting to understand the cryptocurrency market and what goes into the reporting. And they're even leveraging some of these resources, these online resources, because these service providers have gotten smart and have realized, "Hey, we don't just need to give this to people that are doing their own taxes and doing their own trading. We need to leverage this for the practitioners." And, so, there's actually practitioner versions of these resources that the CPAs, themselves which is great. I mean, I recommend that to every CPA I come across, that has clients with crypto, and it makes their life easier.

So, there's ways to collaborate. And it takes a village right now, partially, just because crypto's moved so fast that there's ... I mean, the learning curve is steep, and a lot of very experienced advisors, a lot of very experienced CPAs, it's just ... It's a completely new world.

Pam Krueger:

Alongside, when we post this video, I'm going to have a couple of questions that came, as emails, from people wanting to know about a Roth IRA with crypto. The other wanted to know how to invest in different types of crypto.

So, I want to invite the conversation to continue by emailing me directly at ... Email me at askpam@wealthramp.com.

And Jeff, I want to thank you so much. I promised we'd have ... we'd kind of keep this contained, but there's so much to know, but I'm really happy that we got to cover the really important pieces of what not to do this tax season. The answer is report, report, report.

And, of course, you'll find Jeff George, as one of our advisors in our network. These are advisors I have personally vetted myself. So, come to us with your questions, and we look forward to continuing this conversation. And Jeff, thanks a lot for taking the time today.

Jeff George:

My pleasure.

Finding the right financial advisor can be challenging. Let Wealthramp help you find the right advisor who will help you with your personal financial needs and situation.

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