Ask an Advisor: What are the safest ways to invest in cryptocurrencies? (Plus, how to avoid crypto scams, and more.)

Question: What are the safest ways to invest in digital assets like NFTs and cryptocurrencies to avoid scams? 

David: This is a great question. The safest way to invest in the digital asset ecosystem is to store all digital assets in cold storage on a personal wallet (e.g., Ledger, Trezor). The common adage, “not your keys, not your coins” is quite common. 

With the collapse of Voyager, Celsius Network, and FTX – this phrase could not have rung more true. The downside to doing this all yourself is that, ultimately, you are responsible for doing this all correctly. If you make a mistake, it’s on you, and there is little to no recourse. 

The other option is to entrust your funds to a qualified custodian where the customer’s assets are genuinely segregated from the corporation’s balance sheet. This is the only way I invest for my clients in the digital asset space. Some custodians that fall into this category are Gemini and Paxos. I like this option the most, but it depends on your comfort level and the crypto market area you wish to invest.    

Question: My friend lost a little more than $300,000 in a crypto scam. How much, if any, can he take off his taxes? The majority came out of his portfolio, but some out of IRAs which he knows he’ll be taking a big hit on there.

David: It is disheartening to hear about your friend’s $300,000 loss in a crypto scam. If you lost money in a crypto scam, the short answer is that you cannot deductible those losses as theft losses under the Tax Cuts & Jobs Act was passed post-2017. Now, reporting your lost crypto as an investment loss is the only approach that allows a tax benefit. 

Investment losses are similar to a loss you would incur from buying a stock, cryptocurrency, or another property and then selling it for less than you acquired it for. This type of capital loss is reportable on Form 8949, where you must list your cost basis in the property, the fair market value when you disposed of it, and the net gain or loss. Any year, up to $3,000 of net capital losses are deductible. Larger losses will carry forward to future tax years. This is the basic process for reporting the majority of cryptocurrency transactions.

Unfortunately, which crypto loss scenarios qualify for the investment loss status is unclear. We recommend consulting a tax professional with a unique situation. Our team is always happy to help refer you to someone. This article does a great job explaining all the nuances here. 

Question: I’m interested in investing in digital assets like cryptocurrencies, but my financial advisor rolls his eyes when I bring this topic up. What should I do?

David: I’d recommend finding an advisor that understands cryptocurrencies and can recommend investment solutions in this burgeoning asset class. Investment advisors need to be thoroughly trained and educated before dismissing digital assets. I believe investment advisors who do not inform their clients about the space are doing a massive disservice to them.

Question: When trying to withdraw funds from cryptocurrency platforms, are you to pay taxes upfront before the transaction can be completed? How does that work?

David: Typically, you settle up with the IRS when you file your taxes. Cryptocurrency platforms vary in the form of tax documentation they provide to their clients. Nonetheless, your tax return should document all gains and losses properly. Consider working with a tax advisor who can properly guide you. Digital assets are taxed like any other capital asset (e.g., stock, bond).

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David Warshaw is a financial advisor and founder of The Wealth Plan, LLC, who offers comprehensive financial planning and wealth management services to clients nationwide from his hometown of Fort Lauderdale, Florida. Get to know David by visiting his profile page on Wealthtender or his website at thewealthplan.com.

Please note that Wealthtender earns a nominal monthly fee from David in exchange for providing access to the benefits described here, subject to these terms. This compensation creates a natural conflict of interest when we favor promotion of David and other financial advisors in the Wealthtender community over advisors not featured on our platform. Wealthtender is not a client of these advisors or firms.

This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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