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Crypto And Taxes: What Financial Advisors Need To Know


With the recent market movement, understanding the tax implications (and opportunities) of investing in crypto can be the key to successfully navigating these choppy waters

It’s no secret that cryptocurrency has experienced a growth in popularity among many financial advisors, and investors in general. Digital asset management is becoming an increasingly common request for advisors to receive from their clients. 

Failure to comply with the tax laws that govern the trading of digital assets can result in IRS fines for your company and your clients. It’s important that as a financial advisor you have an understanding of these laws and regulations.

So, when it comes to crypto portfolio management and the taxation of your clients’ digital assets, what are the rules?


How Does The IRS Tax Digital Assets? 

Simply put, the IRS regards digital currencies as property, in the same vein as more traditional investments such as stocks and bonds. 

The IRS webpage on the taxation of digital currencies stipulates that the sale or exchange of cryptocurrencies for investment purposes (or using them to purchase goods or services) is a taxable event.  

Based on the length of time your clients hold their digital assets, either short or long-term capital gains taxes will apply when they decide to sell. 

If the digital assets are held for over a year and then sold or exchanged at a profit, long-term capital gains taxes will be applicable based on the gain (difference between the sale price and purchase price) generated. 

For investors who held cryptocurrencies in their portfolios for less than 12 months before disposing of them at a profit, regular income taxes will be applied (as high as 37% for the top income brackets). 

It’s also worth knowing that cryptocurrency is currently not subject to wash sale regulations, which prohibit investors from re-purchasing an asset within 30 days of selling it. 

This allows investors who are experiencing losses on their crypto positions to sell them and receive a tax deduction that can be used to offset gains from the sale of other assets in their portfolio.  The cryptocurrency can then be immediately re-purchased without having to wait 30 days, and thus avoid any potential negative market exposure. 

There is currently legislation being debated that would remove this loophole for cryptocurrencies. If the Build Back Better Act is passed, wash rules would then also apply to hard currency and ForEx trading, as well as commodities.


Crypto And Charitable Donations 

Another important consideration to advise your clients on when it comes to matters of crypto and taxation is using charitable donations to defray their tax burden.

If your clients have held cryptocurrency for longer than 12 months and they choose to donate it to charity after it has appreciated in value, they may deduct the fair market value of the digital currency they gifted from that year’s taxes.

Currently, there is a cap of 30% of total income in place, meaning that for any given tax year, the deduction for the donated assets may not exceed 30% of your clients’ gross income. In the event that it does exceed the 30% mark, investors are allowed to carry over their additional deduction points for a period of 5 years.

Keep in mind, though, that if your clients are donating more than $5,000 in cryptocurrency, they will be required to get a qualified appraisal prior to making their donation. 

Donation appraisals can cost up to $500 or more, so be sure to help your client factor that into their decision-making. Given the size of the tax break they were going to get, the cost of the qualified appraisal may make it more practical to donate a different asset class, or just give cash.


HeightZero Simplifies Digital Asset Management

As a financial advisor, managing your clients’ digital assets can be stressful and occasionally difficult, because the landscape surrounding cryptocurrency shifts quickly (both the markets and the regulations governing them).

HeightZero’s secure platform can help you manage taxes and reporting requirements for your clients’ digital assets, as well as seamlessly integrate your current portfolio management system to execute trades, perform quarterly rebalancing, get current performance reports, and much more.

To learn more about how we can help you effectively manage your clients’ crypto investment portfolios, request your free demo today.

Please note, this article is intended for informational purposes only and should not be considered investment, tax or legal advice. Consult your investment, tax and legal teams for definitive guidance on any digital asset.