How to Manage Your Digital Assets
The financial world has shifted greatly since the introduction of digital assets with the Bitcoin Protocol in 2009. Since then, the term “Digital Assets” has expanded to cover a variety of financial elements. Digital assets are electronic files of data that can be owned and transferred by individuals.
These electronic files can be used to make transactions, or as a way of storing intangible content, such as computerized artworks, video or contract documents. Examples of digital assets include crypto currencies, such as bitcoin, so-called asset-backed “stable coins,” (which have recently experienced unexpected price volatility) such as tether, and non-fungible tokens (NFTs) — certificates of ownership of original digital media.
In a survey of almost 800 institutional investors, 36% of responders say they have already invested in digital assets, while 80% say they find digital assets appealing.
Clearer regulations, and several directives which allow for easier adoption of digital assets from the Office of the Comptroller of Currency, have allowed one of the most popular digital investments, cryptocurrency to gain momentum. Approximately 15,000 businesses worldwide accept the most widely used cryptocurrency, Bitcoin.
The biggest challenge new digital asset investors run into is managing and storing their assets conveniently and securely. It is important to have a clear understanding of your digital portfolio to avoid paying extra fees, or duplicating assets.
When you purchase a digital asset you have two options:
You can leave it on the exchange on which you bought them.
You can select the more secure option, which is to move them into a crypto wallet.
Crypto wallets do not actually store your crypto coins. Instead they store your private and public keys needed to access your cryptocurrency, and allow you to send or receive cryptocurrency in a safe and accessible manner. Crypto wallets come in different forms, from “hot wallets” like Mycelium to “cold wallets” like Ledger.
Hot or cold simply refers to whether or not the wallet is stored online. Hot wallets are online digital storage software that you can access on your computer or phone, often free of cost. This method is more secure than leaving coins on the exchange platform, but keeping data online always comes with high risks and dangers of being hacked.
Cold wallets, on the other hand, are physical hardware wallets that often look like USBs, where your cryptocurrency is stored offline. This reduces the risk of being hacked, but cold wallets are a more expensive option that can cost you up to $200. Another draw back is if you lose your key-phrase, your crypto coins are lost forever.
It is important to pick your method of storage based on your specific needs. For someone who has just begun to dive into buying and selling crypto, leaving your coins on the exchange or using a hot wallet might make the most sense. If you are making large investments, you may want the extra security that comes with using a cold wallet.
Keeping your cryptocurrency secure is not the only thing that you have to consider when it comes to your digital assets.
The IRS considers cryptocurrency holdings to be property, and exchanging crypto is considered a taxable event. While simply buying crypto with USD is not taxable, any time you trade crypto for a service or other investment, it becomes a taxable event. If you chose not to report your digital assets on your taxes, you could incur interest penalties or even criminal charges.
Because the IRS considers virtual currencies property, their taxable value is based on how much value your holdings gained or lost in a given period, also known as capital losses or gains. If you trade digital assets professionally, you can deduct business-related expenses on your tax return.
To avoid any surprises during tax season, ensure you have a plan. Do not wait until tax season to collect your records, collect them as you go and it will be much easier for you in the long run. If you are making large or complex transactions, then consider using the help of a professional.
As the digital asset world keeps expanding, the rules and regulations surrounding them will continue to shift as well. At Ulrich Investment Consultants, we continue to study the evolving landscape of digital assets and decentralized finance. While cryptocurrencies have not served to be a safe haven during the recent market correction, and instead experienced increased correlations, we do believe the block chain technology that supports crypto assets has merit, and many of the companies in our client portfolios benefit from this technology. As the complex world of digital assets expands, Ulrich Investment Consultants has the knowledge and experience to help guide you. Reach out to us here: ulrichcg.com/contact-us/. We are ready to answer any questions you may have, and start finding the right solutions for you.