How to Avoid Capital Gains Tax
Are you wondering how to avoid the capital gains tax?
First, let's clarify exactly what the term capital gains tax means. A capital gains tax is the fee you're responsible for paying to the IRS after making a profit from selling an asset. It applies to stocks, bonds, securities, real estate, cars, boats, gold, furnishings, and other assets.
A capital gain is assessed based on what you pay for an asset versus the amount you get when you sell it. Additionally, there are two ways capital gains are taxed, based on how long you hold an asset.
If you hold an asset for a year before selling it, you're in the sweet spot to qualify for a favorable long term capital gains rate. However, if you sell before a year, you'll be taxed at a higher rate for a short term capital gain.
The good news is that there are plenty of tips for staying tax-free to get the perks of a capital gain without the penalties.
1. Invest in a Tax-Deferred Savings Plan
A capital gains tax liability isn't triggered when you buy or sell securities within tax-deferred retirement plans. This includes Roth IRAs, traditional IRAs, SDIRAS, and 401(k) plans.
Your capital gains won't be taxed until you begin withdrawing funds from your account. This strategy isn't just delaying pain until that day. Capital gains are taxed at your ordinary income rate. so people who slide into lower tax brackets after retirement can benefit.
What's more, any Roth IRA and 401(k) funds specifically are immune to capital gains taxes under some conditions.
2. 1031 Exchange
Are you planning to be a repeat investor? Some perpetual property investors never get stuck holding the bag with capital gains because they take advantage of the 1031 exchange loophole.
Section 1031 of the U.S. Internal Revenue Code allows you to avoid paying gains taxes after selling an investment as long as you reinvest the proceeds from the sale within a certain window of time. The stipulation is that you must reinvest in a similar property that's of greater or equal value to the one you sold. However, this strategy is a great way to raise capital for real estate.
3. The Primary Residence Exclusion
What exactly is the primary residence exclusion? This little-known IRS rule allows people who meet specific criteria to exclude $250,000 (single filers) to $500,000 (married filing jointly) in capital gains tax after making a profit from selling a home. Here's what's required:
- The home you sold was your true primary residence.
- You've owned and used your home as your main residence for at least two out of the five years prior to its sale date.
- You haven't already used the primary residence exclusion for another home during the two-year period before the sale of your home.
You must report the sale of your home even if your gain is considered excludable. The IRS also provides some exceptions for the five-year usage test. Homeowners on extended duty in the military or intelligence community may be eligible to have the period bumped up to 10 years.
4. Donate to Charity
One of the smartest ways to offset capital gains if you cannot avoid selling assets when your income places you in a high tax bracket is to utilize tax deductions for charitable donations. An accountant may be able to help you donate the right amount to slide into a lower bracket to avoid a larger-than-necessary tax bill. This strategy applies if you're itemizing your deductions.
5. Offset Gains With Losses
A capital loss is any loss on the sale of a capital asset. This includes stocks, bonds, and investment real estate. Capital losses are actually divided into long-term and short-term losses using the same calendar used for measuring long-term and short-term gains.
In fact, short-term and long-term losses are actually first deducted against short-term gains and long-term gains. While tax laws are always changing, you can generally expect to be able to deduct an overall net capital loss for the year against salary, interest income, and other forms of income. Excess net capital losses can also be carried over to future tax years.
6. Invest in Long-Term Stocks
This next tip shouldn't necessarily be done without the help of a tax professional. One slightly intricate way to potentially defer capital gains tax until 2026 is by investing unrealized capital gains within 180 days of a stock sale into something called an Opportunity Fund.
In addition, some investors take advantage of small business stocks to have up to $10 million in capital gains excluded from income.
The trick is understanding how to invest during inflation to counteract any losses.
8. Figure Out Your Cost Basis
You can keep more of your capital gains by subtracting the cost basis from your sale price. How you calculate cost basis can impact your capital gain rate. Many people find that adjusting the original purchase price to account for commissions and fees can reduce taxable gains.
9. Gift to Someone or Move Somewhere With a Lower Tax Bracket
Finally, some creative strategies are available if you're stuck with paying capital gains based on the way your sale price intersects with your income bracket. For example, consider gifting the appreciated asset to a family member instead of selling it.
The IRS currently allows taxpayers to gift a person between $16,000 (single filer) and $32,000 (couple filing jointly) without needing to file a gift tax return. When you gift the asset to another person, the gains are taxed based on that person's income instead of your income. Just be cautious about using this strategy to gift assets to children or students under the age of 24 because dependents are taxed at the same rates as their parents.
Final Thoughts on How to Avoid Capital Gains Tax
The key to understanding capital gains is knowing that the tax code rewards investors in it for the long game. The simplest way to avoid capital gains tax when selling an investment asset is to get past the one-year threshold for ownership before selling.
Capital gains are taxed based on your ordinary income rate, so reducing income through losses, donations, or other means is the other strong alternative for avoiding a huge tax hit.
Are REITs a Good Investment? How About in Economic Downturns?
Real estate investment trusts (REITs) offer an affordable way to invest in real estate without lots of capital.
In addition, REIT dividends can feel like a shelter in a storm because they offer consistency as an inflation investment. However, anyone considering this option should do their due diligence before they invest in real estate.
This begs the question, are REITs a good investment? To answer this question, let’s take a look at the pros and cons of REITs, different investment options, and their outlook in the current economic climate.
What Are REITs?
REITs are an investment option that allows you to invest in real estate without the need to purchase a property on your own.
REITs own and operate income-producing commercial and residential properties.
Common REIT properties include apartment buildings, office buildings, warehouses, malls, hotels, and storage facilities. So while you're not collecting monthly rent the way you would if you happened to be the sole owner, you are getting regular dividend yields with the perk of not having to take a hands-on approach to the day-to-day management or operations of the property.
You essentially own a stake in a property in the same way you own a stake in a business when you invest in S&P 500 companies in the stock market. However, since most REITs consist of a bundled set of properties, they’re more similar to index funds or other basket goods.
Investing in a REIT isn't the same thing as just investing in commercial real estate as part of a group. REITs are required to meet certain standards that are determined by Congress and the IRS. A legitimate and legal REIT must meet the following qualifications:
- Must invest at least 75% of total assets.
- Must return a minimum of 90% of taxable income in the form of shareholder dividends annually. Consider this a big perk for your earning potential.
- Must receive at least 75% of gross income from real estate properties in the form of rents, mortgage interest, or sales.
- Must claim a minimum of 100 shareholders following a full year of existence.
- Must not have more than 50% of shares held by less than five investors during the second half of the tax year.
While some REITs are labeled as equity REITs that function as "landlords," others are simply mortgage REITs that collect monthly payments from tenants after acquiring existing mortgages. Of course, finding a hybrid REIT that does both is possible.
The perk of qualifying for a REIT is that true REITs aren't required to pay taxes at the actual corporate tax level. As a result, they are in a better position to finance real estate than other individuals or investment companies. What that means for you as an investor is that a REIT's payout can grow to create larger and larger dividends over time.
Pros and Cons of REITs
REITs and small-time investors can be a match made in heaven during a downturn because investors enjoy a decent amount of insulation from volatile exchange traded funds. After all, people will always need a place to live. So let's dive into the pros and cons to get the full picture.
REIT Pros:
- REITs allow you to diversify away from being dependent on bonds and stocks.
- REITs offer high dividend yields due to the rule that REITs must pay at least 90% of taxable income to shareholders.
- REITs allow you to diversify your investments geographically. That means you can invest in real estate in specific markets with stronger performance compared to the nation as a whole.
- REITs offer a hands-off way to benefit from real estate investments. In addition, the personal risk is much lower than trying to flip, lease, or manage properties on your own.
- REITs create a historically high-performing asset class. In fact, the three-year average for total returns on REITs between November 2017 and November 2020 was 11.25%. That beat the S&P 500's 9.07% for the same period.
- REITs are pretty liquid. While unloading your own property might be a hassle, you can buy or sell REITs online quickly online using a brokerage account.
- REITs offer power in numbers. For many people, a REIT is the only way to get access to class A office buildings as investments.
REIT Cons:
- Rising interest rates can sometimes reduce the value of a REIT.
- Dividends are typically taxed at your normal income rate. Of course, you'll want to chat with a CPA to maximize your tax options.
- REITs can ebb and flow with commerce trends. While you may be riding high when spaces for cupcake shops are in demand, value can fall once the fad fades.
- Some REITs charge high management fees. Do your homework!
- While REITs can be great in the long term for steady and robust dividends, this isn't a good option if you're looking for dramatic short-term returns.
Who Can Invest in REITs?
Anyone can invest in a REIT. However, the bottom line isn't so crisp. This is where it becomes necessary to talk about how much is needed to invest, how much you need to be worth, and the different types of REITs available to you.
How Much Money Do You Need to Invest in a REIT?
REITs often require minimum investments ranging from $1,000 to $25,000. Most private and non-traded REITs are only open to elite accredited investors with a net worth of $1 million. For non-millionaires, the requirement is typically two to five years of annual income between $200,000 and $300,000.
Are REITs Safer Than Stocks?
It's hard to get a consensus on this. A combination of expense and lack of safety margin on stocks can make them intimidating for smaller investors. On the other hand, many people think that REITs are safer than stocks during times of inflation and uncertainty because they:
- Are resilient.
- Have low debt.
- Can potentially provide protection against inflation because rents rise with inflation. In addition, debt that is used to finance properties can be "inflated away" while property values rise.
- Tend to have very reasonable valuations that bring stability.
- Have been known to outperform stocks in times of rising rates.
The bottom line is that REITs aren't intended to replace your investments in stock exchanges. Instead, they are there to round out, enhance, and diversify your portfolio. While REITs can definitely have high returns, they carry some risks that aren't seen with other investment options. For instance, you may have your REIT dividends taxed as ordinary income instead of enjoying the dividend or capital gains taxes that go with stocks.
Types of REITs
The main REIT categories are the equity, mortgage, and hybrid options covered above. However, REITs are also classified by how investors buy and hold shares.
The first option is a publicly-traded REIT with shares listed on a national security exchange. Publicly traded REITs are regulated by the U.S. Securities and Exchange Commission (SEC). Next, public non-traded REITs are registered with the SEC without being traded on national securities exchanges. Finally, private REITs are non-regulated REITs that sell shares to investors without being traded on national securities exchanges.
Which REIT Is Best for Me?
First, it's important to know that financial advisors can help you determine which REITs to invest in the same way they can help you to choose which stocks vs. crypto to buy.
First-time investors are more likely to feel comfortable with publicly traded REITs because they offer the stability, transparency, regulation, and liquidity to help you find your way around this investment niche. However, it's important to know that you can get caught up in fraudulent REITs when you choose private real estate companies.
Concluding Thoughts: Are REITs a Good Investment?
REITs are worth looking into if you want a little extra protection during a potential downturn. A REIT can be a great way to get cash flow from a property without putting in any elbow grease. However, REITs should be seen as vehicles to balance stocks instead of "investment hacks" for abandoning stocks.
Three Hot Crypto Staking Misconceptions: Is It Worth It?
Is there anything more misunderstood than crypto? It's hard to find the balance between "the hype" and "the dismissals."
Embracing digital assets doesn't need to be an all-or-nothing investing choice. Anyone who invests in cryptocurrencies has a wide range of options for earning passive income using a combination of classic stocks and commodities investments while also embracing the blockchain network.
One particular area of interest for investors is the idea of crypto staking. While investing in cryptocurrency doesn’t involve any interest or derivatives, crypto staking allows investors to earn interest by staking their crypto on an exchange.
In this article, we’ll discuss what crypto staking is, the benefits, and some misconceptions about staking crypto.
What Is Crypto Staking?
Staking cryptocurrency is the process of verifying transactions on a blockchain by using coins held in a wallet or exchange to forge new blocks. Essentially, when you stake coins in your wallet or exchange, the blockchain ledger uses these coins to authenticate or verify new transactions and form new blocks.
These blocks comprise the open ledger of the blockchain network and allow for various processes, such as trading to occur.
As an investor, crypto staking is essentially the same thing as holding cash in a savings account. Since banks don’t hold all of their capital in vaults, they need to draw cash from elsewhere for withdrawals, such as your savings. The reward for keeping your money in a bank is the interest earned for your holdings.
Similarly, blockchain staking rewards users who hold their coins in a verified wallet or exchange them with interest.
Crypostaking is a purely passive investment, with most of the legwork being performed upfront as due diligence. With generally higher yields, crypto staking makes investing in crypto vs. stocks favor crypto.
What Are the Benefits of Crypto Staking?
Staking allows you to benefit from your digital assets by earning rewards without selling them. Most people compare staking to placing crypto in the digital equivalent of a high-yield savings account.
Staking is a great way for investors to get in without the barrier to entry created by the large minimal investment needed to become a full validator.
The main benefit of staking is that you can reasonably expect to earn 10% to 20% more crypto per year when using crypto on a proof of stake network.
There are generally two types of staking, which we will discuss below.
What’s the Difference Between Proof of Work and Proof of Stake?
- Proof of Work (POW). POW is an algorithm used by Bitcoin, Ethereum, and other major cryptos to secure cryptocurrencies by validating transactions and mining tokens.
- Proof of Stake (POS). POS is an alternative to POW that enables cryptocurrency owners to stake their coins to get permission to check and add new blocks.
POS has been eclipsing POW because it is a more energy-efficient process. You'll need to use a cryptocurrency that uses the POS model if you want to participate in staking.
Misconception 1: The Bubble on Crypto Staking Will Burst Any Minute
Bubble talk comes from the fact that many people presume that the extreme rise of crypto means that it's all some kind of fluke or scam.
A true bubble means that an asset sees a rapid rise in market value during a brief time window, even though there's been no fundamental change to account for the rise in value. This essentially means that the cost of an asset greatly exceeds its intrinsic value to the point that the price isn't aligned with the asset's fundamentals.
Yes, some smaller coins have shown some "bubble" characteristics due to rapid price escalations paired with pump-and-dump hype strategies.
However, established cryptocurrencies have more than proven their intrinsic value while avoiding the volatility of smaller coins. One of the big value points of something like Bitcoin is that it is used for various transactions both at point-of-sale locations and online for a low cost.
Furthermore, Bitcoin's widespread adoption as a global medium of exchange has made it a strong store of value that many people compare to gold. However, with countries adopting Bitcoin as a pegged currency and early adopters hailing it as the future of money, Bitcoin’s price is difficult to discern.
For this reason, there exists the real potential for Bitcoin to go even higher and plenty of opportunities in staking your Bitcoin.
Misconception 2: Staking Coins Doesn't Have Any Drawbacks
Before investing, it’s important to know about the potential downsides. Keep these things in mind:
- Some projects have minimum staking requirements that require you to lock away a minimum holding to get rewards. While this is not usually a problem, there's a potential for big losses if you lock away more than you can afford.
- Staking requires a lock-up period that prohibits your crypto from being transferred for a specific period. That means no trading staked tokens if prices shift. As a result, a large drop in a newly staked asset could eat up interest.
- While high staking rewards may be appealing, some staking assets are awarded on a delayed basis instead of providing daily payouts. This is important because rates of return on staking rewards are subject to change because they aren't guaranteed.
- There are often "unstaking waiting periods" that can last more than a week.
Further, crypto networks can go bust just like any other type of business. Make sure you're doing your homework on a network that's enticing you with generous platform offers and staking rewards to avoid losing all of your staked coins.
Misconception 3: Gains Made From Cryptocurrency Staking Are Not Taxed
Yes, you need to report cryptocurrency activity on your tax returns. This is because the IRS actually classifies cryptocurrency as property. As a result, all cryptocurrency transactions are taxed as property transactions and come with a capital gains tax.
Generally, your long-term gains will be taxed at a rate of 0%, 15%, or 20% based on your income and filing status.
Is Crypto Staking Worth It?
While some people still parrot the idea that crypto is some type of scam, I think that the widespread embracing of crypto by institutions worldwide disproves these claims pretty clearly.
Crypto investing can be a great way to diversify your portfolio, especially if you have a self-directed IRA. However, unlike traditional crypto holdings, staking allows you to make money on your crypto while it sits in your wallet.
The key here is to do your due diligence, especially when it comes to finding the right coin and exchanges to stake your coins.
My takeaway? Everyone serious about investing and fascinated by cryptocurrency should give staking a chance to see if it fits with their investing strategy.
What Should You Invest In During Inflation to Remain Safe?
What are the best inflation investments? It's understandable to want to be insulated now that inflation has hit a 40-year high. Is there room for anxiety and pessimism? Sure. However, I find that it's always important to search for that silver lining when things are getting topsy-turvy in the market.
While other people are panicking about inflation, you could be smartly pivoting to asset classes that protect against inflation.
Unlike past eras of inflation, this particular shift in purchasing power and prices for goods and services arrives at a time when the average person has more access to financial and investing vehicles than ever before.
You can accomplish using an app what a person during inflation in the 1970s or 1980s could only do by getting on the phone with a broker who shuffled some papers to earn a commission. This is precisely why I want to cover some highly accessible personal finance options for inflationary environments to help you determine the best channels for investment during inflation to remain safe.
1. Short-Term Bonds
Many people overlook short-term bonds because this doesn't feel like an exotic option. However, the strength of this option is that you're keeping your money both safe and accessible. Having that money within reach can be important amid rising prices in the consumer price index. Short-term bonds also tend to be more resilient compared to long-term bonds when interest rates rise. In addition, this option gives you the choice to reinvest for higher interest rates once your bonds mature.
2. Treasury Inflation-Protected Securities (TIPS)
TIPS are actually inflation busters by design. Sold by the U.S. Treasury, TIPS have their par values adjusted each year specifically to keep up with inflation. The end result is boosted interest payments for the investor with a highly likelihood of appreciation.
The thing to watch out for with TIPS is that you can't let your expectations equate preservation of purchasing power with guaranteed growth. While you'll never receive less than your original par value once TIPS mature, it's still possible for TIPS value to decrease during your interest payouts. The TIPS three-year daily total return is 5.43%.
3. Real Estate Investment Trusts (REITs)
If the thought of personally investing in real estate is too overwhelming or expensive, you can still invest in real estate through REITs.
REITs are companies that own and operate income-generating real estate. Investors are paid out dividends without the need for any type of hands-on maintenance that goes along with traditional property ownership. This provides broad exposure to a pool of real estate with what can be considered a low expense.
The stability of REITS comes from the fact that rents tend to rise as inflation rises. As a result, your wealth can also rise with REITs without committing a massive investment.
4. Commodities
Prices for raw materials and goods tend to rise with inflation. This is why commodities can be good inflation hedges.
Keep in mind that commodity prices depend heavily on supply-and-demand factors that are often beyond human control. That means that your investment can be impacted by everything from weather and geopolitical events to "influencer" trends. Here's a look at some commodities options that are particularly resilient against inflation:
- Copper.
- Gold.
- Steel.
- Crude oil.
There's no need to put all your eggs in one basket with commodities. Even tried-and-true choices like gold are prone to wild fluctuations. Diversifying commodities is important.
Thankfully, using a self-directed IRA (SDIRA) is one of the best vehicles for holding a variety of alternative investments that don't work with regular IRAs. While a conventional IRA is intended for stocks, bonds, certificates of deposit (CDs), and exchange-traded funds (ETFs), SDIRAs allows you to manage commodities, precious metals, real estate, and much more.
5. Utility Stocks
Utility stocks are really hard to top for slow, steady growth. The reliable income streams of utility companies allow them to pay relatively high dividends.
However, the allure of high dividends is exactly why you should do your homework on utility companies before choosing. Investors would do well to seek out stronger companies even if they present lower payouts in the short term.
Additional Tips for Inflation Investments
Inflationary times require additional vetting before making investments. However, there are some tips to follow regardless of which areas you end up investing in. Keep these thoughts in mind:
- 1. Look for companies capable of raising prices without necessarily harming business. This means that they're very likely to be able to raise prices without taking a revenue hit.
- 2. While it's never a bad idea to keep some percentage of your cash liquid, you don't want to miss out on opportunities for high yield over the long term by sitting on what you have out of fear. Historically, your cash can earn a much higher interest rate when invested in stocks compared to when it's sitting in a savings account. That's not advice to pour everything into an index fund. You'll want to follow the rules of personal finance to keep more cash around if you're on a fixed income compared to someone with potential increases in earning potential.
- 3. Branch out with cryptocurrency for retirement and short-term investing. The limited supply of cryptocurrencies could end up making this a great inflation-proof investment over the long run.
- 4. If you're currently renting, consider that locking in a fixed rate on a mortgage might be a smart investment against the rising rental costs that accompany inflation.
There's no need to let your money sit just because inflation creates unique investing challenges. It's a matter of balancing historical returns with the current actions of the Federal Reserve to make your decisions.
Utilizing self-managed investment tools can be a great way to ensure that you're adjusting your strategy in real-time based on market happenings.
7 Crucial Lessons About Buying Property With Delinquent Taxes
The real estate market is a driving force for most investments. Yet, sometimes, the wide range of proven investment areas and the hidden potential of seemingly unpopular niches can baffle even the seasoned investor.
With the right strategy on how to buy a property with delinquent taxes, you can tap into a new source of revenue. Plus, such investments will provide a decent alternative income.
So how can buying property with delinquent taxes help you increase your passive income? And what steps should you follow to invest in buying tax liens properly?
Let's find out.
1. Learn the Step-by-Step Process That Underpins the Tax Sale
A county’s taxing authority initiates the tax lien sale due to a homeowner's prolonged non-payment of property taxes.
The lien purchase procedure is fairly straightforward, and it is usually similar to buying a property. Still, before investing in tax liens, you need to learn the process from the inside and sort out the legal ramifications before the deal.
A typical tax lien formation process is as follows:
- Payment of property taxes is suspended or discontinued
- Debt is generated and accumulated to form a tax lien
- Tax liens are placed up for auction
- The tax collector transfers money acquired from the sale to cover tax liabilities
- The highest bidder at the auction obtains the right to collect taxes from the property owner
- The homeowner must pay the lienholder the debt plus interest or else face foreclosure
2. Select the Proper Investment Tool
Investing in tax liens is a time-consuming yet effective way to generate additional income, so discussing the differences in tax sales— namely, tax lien sale and tax deed sale.
The former initially entails the purchase of a tax lien to become a lienholder with no title to the property. Later, if the property owner continues to fail to pay debts, the investor has the right to foreclose on the property through litigation.
In a tax deed sale, ownership of the property is assigned to the new owner with the mandatory requirement that the entire amount owed must be paid within a short period.
Failure to comply with these obligations will result in the new potential owner losing possession of the property, and the sale will be canceled.
Some tax liens involve a redemption period to allow the former owner to pay off the debts. For example, according to the state law of Illinois, the redemption period constitutes 24 months, while in South Carolina, it takes only 12 months.
3. Perform a Real Estate Market Analysis
Each state sets specific real estate laws and tax procedures, so narrowing your search to one or more specific states/counties is recommended to examine the foreclosed property in more detail and understand all the legal processes governing the deal.
Also, keep in mind that low-income or financially challenged communities may offer a list of properties with a broader range of deals and exceptionally favorable terms for tax lien properties.
Thus, research the county's financial situation and identify the most promising areas to find the best deals.
4. Analyze Delinquent Property Options
Since purchasing a tax lien does not involve a physical inspection before signing the sale agreement, it is impossible to estimate a property’s actual value.
Nevertheless, by requesting official data from the county, you can calculate the approximate value of the asset. If this figure is higher than the value of the tax lien itself, the deal will be considered a sound investment.
Even with a positive estimate, however, you should keep a certain amount of funds available to restore or repair the property in the event of unforeseen situations.
5. Find Out the Hidden Fees
Of course, your primary goal is to acquire a tax lien on the property, according to all your requirements, with no additional expenses of covering debts hidden from the eyes of a potential investor when it comes to describing the delinquent property.
That is why, before the deal itself, you need to eliminate the risks associated with hidden fees and other types of unpaid taxes and outline the legal aspects and state requirements for the successful completion of the deal.
To ensure the legality of the sale, potential investors are entitled to contact the county treasurer's office to apply for details of any extra debt.
6. Take Part in the Public Auction
According to the legislation of most states, a property tax lien can be conveyed to the taxing authority for non-payment of real estate debts. This legislative body, in turn, has the right to place the tax lien at public auction for further sale.
Often, many counties, such as Humboldt in California, display public records regarding the upcoming auctions on their websites, detailing the minimum amount for the initial bid, type of property, and its location for the potential buyers to register and get prepared for the bidding.
Local tax collectors can also provide the required information on the lien tax auction.
Once you've chosen a tax lien to buy, take part in so-called bidding wars and close the deal to qualify for obtaining a tax lien certificate.
7. Getting Income From a Tax Lien Property
A tax lien certificate is an official document that authorizes you to collect all unpaid taxes from the property owner and receive interest from the property, representing a passive income source. This easy-to-learn investment requires fewer financial assets and guarantees on-time monthly accrued income.
Basically, property tax liens can take a worthy place in the real estate investment niche due to the simplicity of executing deals and obtaining a fixed interest rate by the tax holder.
Over time, investors earn a high level of passive income if they properly analyze the market and invest in promising investment products. Although certain risks exist when acquiring a tax lien, they can be reduced to zero with the right approach to investing and adhering to the above-mentioned points.
Tax Lien Investing: How-To Guide For Real Estate Investors
As a real estate investor, have you ever considered earning interest from property lien taxes? While tax lien investing can be risky for inexperienced buyers, it can provide outstanding returns for shrewd investors.
Tax lien investing may not be for everyone, but it can offer substantial benefits to those who understand the pros, possible cons, and process.
To successfully add tax lien certificates to your investment portfolio, you need to know how they work and the rules and potential pitfalls associated with them.
What’s a Tax Lien?
Tax liens are legal claims placed on properties when owners fail to pay their taxes. When someone fails to pay property taxes to the government, their county or city can place a lien on their property for the unpaid amount.
When a property has a lien on it, it can’t be sold or refinanced until someone pays the taxes to remove the lien.
Typically, a municipality will place a lien before more severe penalties occur, such as a tax levy or seizure of the property. Currently, 29 states allow tax lien sales.
What is Tax Lien Investing?
A tax lien certificate is a legal document that reflects the amount an owner owes on a property (plus any penalties and unpaid interest associated with it). Municipalities can sell these certificates to private investors via auction. The highest bidder may purchase the certificate and pay the tax bill plus any interest and fees owed.
The investor can then collect any new interest payments from the original property owner until they repay their outstanding debt. The investor may acquire their property deed if the owner fails to pay off the delinquent tax amount and associated fees within a 120-day timeframe (the redemption period).
The goal is for the property owner to pay their taxes. The investor can then make back their original investment plus any interest that accumulates. If the owner doesn’t make their payments by the expiration date, the investor must foreclose. However, most property owners redeem their property before foreclosure happens.
What are the Benefits of Tax Lien Investing?
It’s important to carefully consider whether tax lien investing is right for you. It can be a gratifying endeavor if you understand the risks and can navigate the regulations. But proper research is essential to avoid missing crucial details.
Here are some of the top benefits keen investors may experience.
1. High-Yield Investments
Tax lien investors can profit off the tax lien’s interest rate, which can be high in some states. There’s also a chance that you’ll acquire a property for much less than its market value.
2. Low Initial Investment
Compared to many other types of real estate investing, tax lien certificates may require lower initial capital. When purchasing a tax lien certificate, you can expect to pay around 3-7% of the property’s total value (U.S. News).
3. A Passive Initial Investment Option
Some individuals like to take advantage of this type of investing without being overly involved in the bidding process. If you’re one of them, you can partner with a professional or fund manager from the National Tax Lien Association (NTLA). You may have the opportunity to invest without attending the auction, leaving the process to experts in the field.
4. Fixed Sum Payments
Once an investment resolves, you will receive a lump sum. Receiving fixed amounts can make it easier to predict your returns.
What’s the Difference Between a Tax Lien and a Tax Deed Investment?
While both liens and deeds go to auction, the buying process is quite different. For tax deeds, you’re bidding on a property title rather than a rate of return. As a result, the highest bidder will win the tax deed and become the new owner of the property.
Expert Tips for Tax Lien Investors
Consider these tips for researching, purchasing, and managing tax lien certificates successfully.
- Do your research to avoid unnecessary risks and pitfalls throughout the process. The NTLA offers courses to prepare and educate future investors.
- To find tax liens for sale, you can call your county tax collector or look up their website to learn the specific bidding process for your area and how to register as a bidder.
- Consider working with a tax lien professional, especially when just getting started. Many members of the NTLA are active investors and fund managers who can help you navigate complex rules and regulations.
- Expect to play an active role in the process. Be ready to notify the property owner that you’ve purchased the certificate in an auction. You must also inform them if they haven’t made the required payments at the end of the redemption period.
- Don’t go into the process expecting to foreclose on a property since it rarely happens.
- Before bidding in an auction and purchasing a tax lien certificate, ensure you understand how tax liens and auctions work in your local area. Laws vary by county.
- Know your goals before starting the process. Prices and interest rates vary by state, so your ROI can too.
- Diversifying your investment portfolio can help minimize the risk.
Real Estate Investing
If you’re an experienced investor who understands the real estate market, tax lien investing could be a smart move. Doing your due diligence can make it worthwhile, making the process easier and earning you a higher return on investment. Speak with a financial advisor or real estate agent to get started.
Cryptocurrency for Cannabis: A Booming Business Solution
At first glance, cannabis and crypto have nothing in common, but what can we discover with an in-depth analysis of these two concepts?
Is it possible for these industries to go hand in hand to achieve a common goal?
How can the world of cryptocurrency contribute to the development of cannabis legitimacy?
The Essence of Cryptocurrency
Crypto-money or cryptocurrency is a digital asset that does not resort to banks in order to conduct or verify financial transactions. It is a peer-to-peer solution that allows you to send and receive payments anonymously and without intermediaries.
All data is secure because it exists solely in a digital form within an online database that contains transaction-specific information.
Such digital records form a blockchain technology with advanced encryption, which is used to store and transfer digital currency data between wallets and from/to public registries. The main difference between blockchain and traditional banking lies in decentralization.
That is, there is no regulatory or organization monitoring the process. Besides, the information is not concentrated on servers in one place but distributed in a huge network of computers worldwide.
One of the most widely used cryptocurrencies (that needs no introduction) is bitcoin (BTC). Many investors see it as an opportunity to develop their capital by investing in BTC. As of November 2021, bitcoin holds a market capitalization of $1.274 billion.
5 Key Reasons to Benefit from Using Crypto
The ever-growing cryptocurrency industry offers new opportunities for all kinds of monetary transactions. It’s no secret that crypto operations feature a more significant number of benefits compared to traditional currency transactions and other financial assets. Some of the perks while performing any crypto operation include the following:
1. Low Transaction Fees
As mentioned above, transactions in cryptocurrency systems are carried out according to the P2P principle, excluding the involvement of a central supervisory authority. Therefore, reducing the costs of maintaining the network allows for a significant reduction in transfer fees.
Furthermore, unlike banking and electronic payment systems, users can set their fees and even send transactions without payment.
2. Fast Processing Speed and Irreversibility
Cryptocurrency tends to handle any transaction at high speed. In addition, once it is added to the blockchain, it becomes irreversible. The irreversibility of transactions prevents record forgery and fraud within the system.
3. Confidentiality and Reliable Data Protection
Privacy is definitely one of the key advantages of cryptocurrencies. You don't have to provide any personal information to access the system, which allows you to remain anonymous and keep your expenses out of the reach of the government, financial institutions, or marketing companies.
In addition, the money in any cryptocurrency wallet can only be accessed by providing a private, encrypted key that belongs only to the owner.
This means that no one can deduct coins from your account or suspend their movement.
4. An Easy Way to Invest and Build Capital
Cryptocurrencies can be a means of protecting your capital. For example, if a bank declares bankruptcy or the government fails to perform its duties diligently, the coins in a cryptocurrency wallet will become a financial insurance backup and help avoid typical banking problems.
5. Inflation-Proof
Cryptocurrencies implement a sophisticated method explicitly designed to prevent inflation.
Every cryptocurrency network has similar mechanisms, making it possible to predict how many coins will exist in a certain time and prevent it from devaluing in the financial market.
Legal Issues Behind Cryptocurrency and Cannabis
The cryptocurrency market is filled with different coins with a specific concept and purpose. Some are launched by commercial companies, while others are tied to a specific community/market.
For example, around 10 years ago, several types of cryptocurrencies were created specifically to become a means of payment for the marijuana trade around the world.
Nevertheless, the legal status of cryptocurrencies, including cannabis-based cryptocurrencies, remains unclear, largely due to the lack of full legalization at the banking level, making them untouchable to FDIC-affiliated institutions.
The emergence of cannabis "currency" has also been triggered by its uncertain status, with only 18 U.S. states authorizing recreational use of marijuana and 37 states approving medical marijuana.
With this in mind, many see a way to solve this problem by developing a specialized blockchain-based system for the cannabis market.
Such cannabis-inspired cryptocurrencies have taken their rightful place and grown in demand in the cryptocurrency market.
Additionally, many financial experts and cannabis community members predict that the crypto cannabis industry will take the place of major market players and become a gold mine as the legalization trend spreads.
5 High-Potential Cryptocurrencies for Cannabis
PotCoin (POT)
This currency was first introduced to the market in 2014. It is considered the pioneering crypto for cannabis businesses, which still leads the way today.
Thanks to its high-profile appearance, PotCoin attracted significant media attention and became a sensation in the crypto world.
The primary purpose of launching this type of cryptocurrency was to create a standard form of legal marijuana payment through a decentralized open-source cryptocurrency.
PotCoin was derived from a fork of Litecoin, and as a result, it completely replicates its technical operating principle.
DopeCoinGold
Like other cannabis cryptocurrencies, DopeCoin emerged because the industry was held back by unfavorable payment terms and the inability to introduce marijuana purchase and sale transactions into banking systems.
But since no real and promising solutions were found, DopeCoin, later rebranded as DopeCoinGold, came into play in 2014. Nowadays, you can buy this cryptocurrency on regulated currency exchanges, such as Bittrex, CoinBase, Binance, Etoro, etc.
CannabisCoin (CANN)
CANN is also a well-known cryptocurrency that has been around for more than five years – it came into existence just a few months later than POT.
Conceptually, CannabisCoin is similar to the first cryptocurrency on our list since it was also designed to facilitate payments between legal marijuana dispensaries.
In addition, CannabisCoin enables its owner to exchange a certain number of coins for licensed products manufactured with the plant, such as cosmetics, CBD oils, hemp oils, etc.
HempCoin (THC)
HempCoin (THC) is designed not only for marijuana distribution but also for the general agricultural industry. Thus, HempCoin primarily aims to facilitate the wholesale purchase of agricultural products. Today, the project has gained popularity.
The company introduced HempPay, a reliable crypto payment platform for legal cannabis purchases – with an app, a website, and a cryptocurrency credit card.
Tokes (TKS)
Tokes' operating principle focuses on performing transactions approved by U.S. laws. With a market cap of $3.51 million and legal status, TKS is considered a profitable investment option.
This crypto seeks to streamline business and reduce costs and comply with U.S. Financial Industry Regulatory Authority (FINRA) regulations. Therefore, this is an easy-to-use solution that addresses the specific payment needs of the industry.
Cryptocurrency Market Prospects for the Cannabis Industry
The cannabis market is one of the resilient sectors in North America. As a result, the outlook for cannabis companies is promising.
Despite the ongoing pandemic and constant litigation, the cannabis-based cryptocurrency is a solid investment tool.
From large-scale mergers to regulatory speculation, plenty of signals suggest that interest in cannabis-based cryptocurrencies will persist and grow in 2022.
Top 7 Bitcoin ETFs and Crypto Funds in 2022
Bitcoin and cryptocurrency have once again made their way into headlines with the latest buzz surrounding the launch of the first bitcoin-linked exchange-traded fund on October 19, 2021.
Cryptocurrency investors looking to take advantage of bitcoin exchange-traded funds (ETFs) were excited to witness the debut of ProShares, the first bitcoin ETF to hit the US market.
This followed the Securities and Exchange Commission’s (SEC) approval of the Volt Crypto Industry Revolution and Tech ETF, providing investors access to companies with huge exposure to Bitcoin.
Though other funds are expected to follow suit in the next few weeks, the road to launching the first bitcoin ETFs wasn’t an easy one. This is mainly because the cryptocurrency market is generally new, largely untested, and volatile, resulting in the SEC’s hesitancy in releasing it to the public.
What is an ETF?
An ETF is an investment channel that allows the performance tracking of assets, whether individual or in a group. This allows investors looking to focus only on gains and losses to access a simpler alternative to buying and selling individual assets as you would with regular stocks.
The Securities and Exchange Commission has received a number of proposals to sell bitcoin ETFs to investors. Experts are estimating that more bitcoin ETFs and crypto funds will be approved in 2022, making it a year to look into these investments. We’ll cover some of the top bitcoin ETFs and crypto funds that are set to make an appearance in the next year.
7 Best Bitcoin ETFs and Crypto Funds in 2022
1. Grayscale Bitcoin Trust (GBTC)
GBTC is not yet an ETF, but neither is it a mutual fund. It’s categorized as a “closed-end grantor trust.” What does this mean? It means it’s an investment channel that holds bitcoins that are mined and transmitted through the peer-to-peer Bitcoin network. This also allows investors to trade those shares in over the counter market.
The price of GBTC shares aim to mimic the price of Bitcoin available on the CoinDesk Bitcoin Price Index. Investors interested in GBTC can buy shares just like you would any normal stocks or shares.
It’s also helpful to note that Grayscale Investments currently manages more than $38 billion in digital currency assets, making it a reliable investment option. Some investors might find the management fee of 2% considerably high compared to mutual funds or other ETFs.
Though GBTC is not a bitcoin ETF yet, it most likely will be converted into an ETF in 2022, making it one of the best bitcoin ETFs to keep an eye on.
2. ProShares Bitcoin Strategy ETF (BITO)
BITO is the first U.S bitcoin-linked ETF launched on October 19, 2021 which aims to expose potential investors to bitcoin futures. It provides investors a unique opportunity to build up their bitcoin returns in a convenient, and more importantly, a transparent way through bitcoin futures contracts.
One important thing to note about BITO is that it does not directly invest in Bitcoin but in cash-settled, front-month bitcoin futures instead. These are contracts with the shortest time to maturity. This also means that the price and performance of bitcoin futures can be different than the current price of bitcoin.
3. Amplify Transformational Data Sharing ETF (BLOK)
BLOK is like many U.S. cryptocurrency ETFs that are usually invested in equities but provides a little more direct exposure to bitcoins. This is because BLOK invests in what’s known as Purpose Bitcoin ETF and the 3iQ CoinShares Bitcoin ETF – two of which are Canadian ETFs in Canadian dollars, while the other is in U.S. dollars.
It is also an actively managed ETF that aims to provide returns with investments from companies that are actively involved in blockchain technologies’ utilization and development.
BLOK’s top three allocations in the blockchain industry are divided into venture capital, crypto miners, and the last being exposure, which represents the three ETFs mentioned above.
BLOK is sponsored by Amplify Investments, a company that believes ETFs empower investors and can cast a wider net of investment opportunities.
4. Bitwise Crypto Industry Innovators ETF (BITQ)
BITQ is another cryptocurrency ETF that is focused on equity. It currently tracks the performance of an index created by Bitwise Index Services LLC, known as the Bitwise Crypto Innovators 30 Index.
Experts will agree that buying into this ETF will give you certain benefits no other ETFs will. Some of these benefits include:
- Exposure to the crypto market without having to directly own the crypto assets
- Exposure to companies currently developing the crypto infrastructure, including miners and platforms
- Access to a piece of global cryptocurrency players
One of the other major benefits of BITQ is that, while it carries the same stocks as other crypto funds, its top 10 holdings account for 64% of its assets. If you are completely confident in the rise of Bitcoin and cryptocurrencies, BITQ may be a good option to invest in next year.
5. Bitcoin Strategy ProFund Investor (BTCFX)
In case you missed it, Bitcoin futures mutual fund was launched in late July 2021, just a few months before the launch of BITO.
Known as the Bitcoin Strategy ProFund Investor (BTCFX), this first publicly available Bitcoin futures mutual fund aims to eliminate the need to manage your bitcoin exposure separately through exchanges or wallets.
It’s also designed to provide investment results by investing in Bitcoin futures contracts or through Canadian ETFs that invest in Bitcoin. The fund features a $1,000 minimum initial purchase. If you’re looking for a way to gain returns similar to an investment in Bitcoin without actually investing in Bitcoin, this may be the option for you. BTCFX paves the way for you to gain exposure to bitcoin without the need to do all the heavy lifting that comes with investing in it.
6. First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT)
CRPT is a fairly new ETF that is looking to invest in companies that are driving innovation in the digital economy and cryptocurrency world. According to a statement on its website, CRPT plans to invest at least 80% of its net assets into these companies.
CRPT is similar to other bitcoin ETFs in that it has a portfolio of 30 holdings with 10 of the top holdings accounting for 60% of its assets. These include top names like Coinbase and Marathon Digital.
7. VanEck Digital Transformation ETF (DAPP)
The DAPP is a newer cryptocurrency ETF that invests in companies that are in the loop of the digital asset economy. Just like BITQ, the DAPP is a smaller, more focused ETF with 25 holdings. The top 10 of its holdings account for 64% of its total assets.
DAPP is a small portfolio with three-quarters of it invested in technology stocks and the rest in financials. Don’t let the small portfolio fool you, as it’s one of the most diversified amongst other stocks.
What’s Next?
The approval of Volt Crypto Industry Revolution and ProShares are indications that regulators are warming up to the idea of cryptocurrency ETFs. Although there have been delays with more than a dozen more bitcoin ETFs waiting for approval including VanEck and Global X, analysts are foreseeing that most of these approvals will happen in 2022.
It’s expected that once SEC begins approving Bitcoin ETF, there’s going to be cutthroat competition with a mix of fintech companies, investment firms, and existing ETF issuers all fighting for a place in the bitcoin and cryptocurrency market. This may impact fees and market data distribution, so it’s best to speak to your fund manager or finance professional while awaiting the approvals of more bitcoin ETFs and crypto funds in 2022.
Is Investing Retirement Funds into Cryptocurrencies Risky or Smart?
If there’s one thing that’s consistently said about cryptocurrency investments, it’s that it’s extremely volatile and comes with its risks.
But investing in cryptocurrency can potentially offer you higher returns and diversify your retirement portfolio. Before jumping into it, it’s important to understand that to invest your retirement funds into cryptocurrencies, you’ll first have to set up a self-directed individual retirement account that allows you to invest in alternative assets.
This is because most, though not all, traditional financial institutions do not allow IRAs to invest in alternative assets, mainly because they earn their fees through traditional investments. We’ll explain a little more about this in the article.
But don’t worry too much about the red tape or limitations. According to the Retirement Industry Trust Association (RITA), approximately 2-5% of IRAs are invested in alternative assets. So, you won’t be the only one. The question is, should you invest your retirement funds into cryptocurrencies? Is it a smart or risky decision?
We’ll explain what it means to invest your retirement funds into crypto and some of the things you should know before making that decision.
Is It Too Late to Get into Cryptocurrency?
While the terms cryptocurrency and digital currency have been floating around the fintech atmosphere for a few years now, the asset is still considered to be in its infancy stage. Is there a potential for crypto to grow even bigger in the next few years? Definitely.
Generally, it’s not too late to get into cryptocurrency, depending on the type of currency you choose to invest in. For example, some may say it’s too late to invest in Bitcoin now since it was first introduced in 2009 and has been popularized so much that it drove the price up. While that may be the case, the cryptocurrency market fluctuates so much that the price of Bitcoin has seen its highs and lows. This means it’s not too late to get into cryptocurrency, you’ll just want to watch the price before you make the jump.
No one can really guarantee the rise or fall of crypto in the years to come as it’s still a very new market that isn’t properly regulated. There are now thousands of different cryptocurrencies in the market, showing the genuine growth potential of the asset. The benefits, returns, and excitement overshadow some of the traditional investments most IRAs prefer, like real estate or stock investments.
So, if you’re thinking about investing in cryptocurrency, don’t worry about being late to the party. Some may say it’s too late now, but they’ll be saying the same thing in 2030.
Are There Tax Advantages with Cryptocurrency Investments?
Cryptocurrency taxes can be a headache. You technically owe taxes each time you sell cryptocurrency at a profit, and it can be a bookkeeping nightmare to stay on top of all purchase prices and gains. Though there are some advantages with cryptocurrency investments because the asset is treated as property.
IRAs in general already receive preferential treatment when it comes to taxes. These advantages can sometimes apply to your cryptocurrency investment, provided you wait until you are of retirement age.
For example, your cryptocurrency tax bill will largely depend on your overall annual income, and how long you have had the crypto asset. If you’ve had Bitcoin or Ethereum for a year or less, these profits are usually considered short-term capital gains and can be taxed at your regular income tax rate.
However, if you have received profits from your cryptocurrency investment which you’ve held on for more than a year, these are considered long-term capital gains which are generally taxed at a lower rate than most income taxes.
How Much Should I Diversify My Portfolio with Bitcoin?
It’s good to know that cryptocurrency is still considered a volatile and risky investment option that’s hard to predict and monitor. One example of this is when Bitcoin fell below $30,000, along with other cryptocurrencies back in June 2021.
Despite the risks, experts are still saying you should diversify your portfolio and consider expanding your investments into cryptocurrency. But how much should you diversify?
Diversifying your portfolio with crypto will depend on how interested and aware you are of the market. Cryptocurrency investors are divided into two main groups — crypto-savvy and crypto-curious. Experts advise those who fall into the crypto-savvy space to diversify up to 4% of their portfolio.
However, those who are crypto-curious can choose to diversify 1% of their portfolio as a form of exploration before taking a deep dive. You can always add to your diversification as you learn more about the market and currency.
With that being said, most experts prefer to err on the side of caution and advise against diversifying anything more than 5% of your portfolio into cryptocurrency.
As with any investments, it’s important to do your research, understand the risks and market trends, and be financially capable before making your decision.
Will Cryptocurrency Be a Good Investment in 2022?
There’s an expectancy that there will be approximately one billion global Bitcoin wallets in 2025. This contributes to the speculation that cryptocurrencies are not just here to stay, but will continue growing in the next few years.
Bitcoin has enjoyed steady growth for the last couple of years, but other currencies are emerging to potentially be better investment options than Bitcoin. For example, Ethereum has been seeing a faster adoption rate than Bitcoin since 2019.
Though this market is considered risky, it has attracted a large number of users and investors. Deciding if cryptocurrency will be a good investment in 2022 will depend on your financial capabilities, interest, and portfolio.
If you’re looking to diversify your investment portfolio with something other than traditional investments, it may be a good idea to look into cryptocurrency investments. Deciding which currency to invest in will be your next thing to consider.
Can You Hold Crypto in an IRA?
As we have mentioned, the primary, and possibly only logical way to hold cryptocurrency in an IRA is for it to be a self-directed Individual Retirement Account. While you may be able to hold cryptocurrencies in your Roth IRA or 401(k) plans, most of these options are not very friendly to alternative assets like crypto or gold.
If you don’t already have a self-directed IRA, you can transfer capital from your current retirement account to an account set up by a self-directed IRA custodian.
Optionally, you can invest with Bitcoin IRA which launched back in May 2016. The company offers investors the tax advantages of an IRA coupled with the return of a high-risk, high-reward alternative asset class. This is just like other IRAs but instead of being funded by gold, cash, or bond, it’s funded by Bitcoin.
Bitcoin IRA doesn’t just deal with Bitcoin. It also includes a long list of other cryptocurrencies including Ethereum and Litecoin.
Economic uncertainties, especially in view of the pandemic and how the market will react to it, should come into play when you’re considering investing your retirement into cryptocurrency. Though it’s not too late to get into the game, the cryptocurrency market is still considered highly volatile and will continue to be so for several years.
As with any investments, if you are financially capable and have done your research, investing your retirement funds into cryptocurrency might not be a bad idea.
Crypto Vs Stocks: What’s Best Moving Forward?
The explosion of both cryptocurrency and stock investing has sparked debates amongst new and seasoned investors.
The stock market has been around in one form or another for centuries and has been the investment choice for most. While cryptocurrency has also been around for several years, it has recently gained popularity leading to its drastic growth.
Both options come with its drawback and benefits. Choosing which to invest in depends on more than what’s popular in the market. Rather, it’ll depend on your current portfolio, investment preferences, and financial capabilities.
In this article, we’ll take a look at the different aspects of both markets and what we can aspect from these investments.
Accessibility
To invest and trade in the stock market, you need to open a brokerage account or get in touch with a stockbroker. This requires having some knowledge about the stock market and fees.
While the stock market’s introduction to the online world has made it more accessible to the public, it still comes with the perception of being heavily regulated with high financial commitments. Although this may be a plus point for some investors by providing safety and ownership, it can be a deterrent for others that don’t understand the market.
The learning curve for traditional stock is also steeper compared to cryptocurrency. Despite the plethora of information about the stock market and beginner guides, it still requires consistent learning and research. Those who lack the time for extensive research can choose to hire an advisor, which is advisable but can be costly.
Cryptocurrencies, on the other hand, comes with a lot of basic level information that’s easier to understand. There’s also a perception that it’s much easier and cheaper to trade cryptocurrencies than it is with stocks. A study found that cryptocurrency appealed more to women and the underrepresented groups for these very reasons.
The growing popularity and cost of cryptocurrencies will continue well after 2022. As corporations and countries begin to accept and regulate digital currency, it’s important to continue watching the market to understand which currency will be popular in 2022.
Risks
There are potential risks in every form of investment. This is especially so with volatility in the market and the current economic state.
The stock market has had a long history of existence, which allows investors and speculators to use historical information to make investment decisions. This minimizes potential risks as there is guidance to refer to for an understanding of where the price might be heading towards. You can account for elements like the ratio of the company’s stock price, to the company’s current financial health to make an informed decision.
There are different risks to consider in traditional stock, which will depend on the stock’s sector. While Wallstreet is expecting the stock market to peak in 2022, some economists are cautious about the expectations taking into consideration the uncertainty of the pandemic and its recovery course.
Although cryptocurrency has gained a reputation for being volatile with sudden drastic changes to its value in the past, the pandemic has shown that it can withstand major economic shifts. By the end of 2020, the world’s best-known cryptocurrency, Bitcoin rose more than 4%. Investors saw Bitcoin as an alternative currency, especially with major companies embracing cryptocurrency as a potential mainstream payment method.
Amidst the different speculations for the traditional stock market, the news is abuzz with the prediction that Bitcoin will continue to grow. Bloomberg predicts Bitcoin will hit an all-time high price of $400,000 by the end of 2021, which will kick off 2022 on a good note for bitcoin investors.
Deciding which currency to invest in will also play a role in the amount of risk involved for the future.
While there are risks involved in an unregulated trade, it seems investors are viewing cryptocurrency as a growth asset that can potentially perform stronger than traditional stocks.
Tax Losses
Having the market value of your investment drop to less than what you’ve initially invested in can be to your benefit. You can sell those investments to harvest your tax losses.
Tax losses are great because they can reduce your overall tax bill. You can use these savings to reinvest or diversify your portfolio. It goes without saying that the more frequently you are allowed to harvest tax losses, the more savings you’ll be able to generate.
Although the stock market allows you to harvest tax losses, it comes with restrictions and limits. You’re only allowed to harvest your tax losses a certain number of times because stocks are considered property and are subjected to the wash sale rule. This may have been beneficial prior to 2020 but could pose a problem in the present and future considering the volatility of the market.
This rule prohibits you from claiming losses on stocks that are sold at a loss and then repurchased within 30 days before or after the initial disposal.
The benefit of tax losses has shifted more towards cryptocurrencies. Certain types of cryptocurrencies, like Bitcoin, allows you to harvest your tax losses more frequently. Mainly because Bitcoin is not treated as a property, and therefore, not subjected to the wash sale rule.
Diversification
Many investment websites will advise you to build a diversified portfolio that should ideally be able to withstand and perform in different markets and economic states.
While stocks have been known to perform well in relation to the broader economy, they can be heavily impacted by factors like inflation and recession.
The pandemic is an example of this where the FTSE, Dow Jones Industrial Average, and the Nikkei fell in the first few months of the pandemic. Although the market is recovering slowly, the possibility of new variants and further lockdowns may trigger more volatility in the market.
Having a diverse portfolio would have been handy and smart during a time like this.
Cryptocurrencies like Bitcoin and Altcoin are known to provide that diversification. Considering how well cryptocurrency has fared during the pandemic, it’s a logical alternative to some of the more common assets.
Cryptocurrency exchanges allow you to use your Bitcoin to purchase other currencies such as altcoins. This gives you the freedom to decide what you want to invest in and how you’d like to diversify your portfolio.
Regulation
Stocks are regulated by national agencies such as the Securities and Exchanges Commission (SEC) in the US or The United Kingdom Financial Conduct Authority. These agencies regulate and oversee stocks and stock markets to ensure transparency is a practice by publicly traded companies.
Being regulated by a government body may provide some comfort and security that fraud will be kept at a minimum. It’s a safety net for investors to ensure they’re not investing in unregulated stocks.
Cryptocurrencies, however, are still largely unregulated.
Cryptocurrencies are operated by decentralized networks with individuals that are focusing on maintaining their technology and maintaining the integrity of the currency. This may be a preference to some investors who aren’t so keen on government regulation and prefer to operate on an independent basis.
President Joe Biden’s budget proposal for 2022 includes cryptocurrency reporting requirements. If the proposal goes through, it will be the first step to regulating cryptocurrencies in the US.
Some countries including Singapore and Mexico have already set up laws and regulations surrounding the use and trade of cryptocurrencies and blockchain.
Uncertainty in the pandemic and how the market will react to it, especially with the new variant is something investors will be concerned about. Stock growth hasn’t been as dramatic as cryptocurrency, but it’s seen better days following the pandemic.
Both markets will continue growing with cryptocurrency expecting to be bullish by the end of 2021, bleeding into 2022.
It’s important to do your research no matter which option you choose. You should research the stock’s financials and find out which digital currency is suits you better before making your decision.