4 Ways to Prepare Crypto Investments for Future Regulation
Investors, corporations, and even Uncle Sam are watching the bitcoin market. If you're one of the 16% of Americans active with crypto, you may question what forthcoming laws imply for you.
We may soon know more. Experts say President Biden's recent executive order on cryptocurrency is a good thing for investors. More regulation might boost market stability and crypto's price and value, says Nicole DeCicco, founder of CryptoConsultz in Vancouver, Washington.
She says, "The train gone." Let's hope it benefits the market rather than stopping it.
Investors and crypto regulation
No one knows how growing regulations will affect the typical investor until the government establishes the rules. Once the dust settles, some market players may not notice significant changes, says Kraken's chief legal officer.
Biden's decision communicates to the crypto business that there's now a "policeman on the beat," and investors who were worried about the market's Wild West character may now regard it as a safer place to invest, adds Santori.
Biden's executive action is not entirely unexpected, and some in the sector regard it as a positive. Santori: "We've waited years." “We're happy to see it and look forward to the results and studies,” he says.
ADVICE
President Biden's executive order doesn't set new cryptocurrency rules or regulations, but it pushes federal agencies to examine risks and benefits. Make sure you're IRS-compliant first.
Experts advocate keeping bitcoin holdings to less than 5 percent of your portfolio and only investing what you're comfortable losing. Before investing, build an emergency fund and pay off high-interest debt like credit cards.
While the nature and timing of potential crypto legislation is unknown, investors may prepare now.
Experts say crypto investors should do four things now to prepare for future regulation.
- Follow your investment plan
No matter what's occurring in the headlines or in White House conference rooms, sticking to your strategy is probably preferable. Just like you shouldn't stop contributing to your Roth IRA or 401(k) after a terrible day or headline, you shouldn't change your crypto approach.
“Change is inevitable, and we think crypto investments will continue to offer chances in traditional markets,” says DeCicco. "Keeping the faith during uncertain times, while hazardous, can help investors maximize their stake while screening out fearful investors."
2. Document
Some crypto investors may have tax liabilities, so keep track of your transactions. The IRS views crypto as property, so trading it is taxable. Joshua White, assistant professor of finance at Vanderbilt and former SEC financial economist, believes investors must track transactions. White adds that several exchanges may already offer year-end tax paperwork to investors.
A bitcoin portfolio tracker can keep your records accurate. This helps active traders. A tracker is a third-party tool that syncs with your wallets to show your gains, losses, and other activity and holdings. Some track price fluctuations, autofill tax forms, or warn of negative balances.
3. File taxes on earnings
Keep records and disclose crypto trading revenue and gains. White: "The IRS wants capital gains records." If you have more than $10,000 in crypto in a foreign exchange or account, report it.
You may also want to check your previous tax returns for unreported crypto and get a crypto portfolio tracker to monitor your transactions.
4. Diversify your holdings
Finally, protect your crypto holdings against market fluctuations and security risks. Diversify your holdings (just like with traditional assets) to reduce the impact of new rules on individual cryptocurrencies or tokens. She feels diversifying is vital regardless of regulations.
DeCicco advocates moving crypto to an offline wallet. "Keep your assets in cold storage," she advises, to thwart cybercriminals.
While these procedures can assist investors keep up with best practices and the IRS, we won't know what new laws or regulations look like for a while.
5. Understanding Crypto Regulation
Unknown rules or regulations should help agencies watch crypto markets. White: “There's regulatory ambiguity since so many agencies are involved.”
The Commodity Futures Trading Commission (CFTC) oversees crypto futures trading, while FinCEN works to combat cybercrime and money laundering. SEC chairman Gary Gensler has called for crypto regulation throughout the past year.
In trying to deal with cryptocurrency, federal agencies are disorganized. White argues that strong laws could create stability.
Don't expect cryptocurrency regulation soon. When White worked at the SEC, most federal regulations were not implemented immediately. "They'll consider what sectors need regulation, develop rules, gather public input, and meet with industry members," he says.
Santori said Biden's executive order is an indication the federal government is becoming involved in crypto. He responds, "It's not a signal flare." This is aimed to reassure stakeholders that the government is on regulation.