The crypto guide to financial planning
This little piggy just learned about crypto taxes and is feeling confident about their 2022 financial goals. [AlexSava via Getty Images]
Was one of your New Year’s resolutions to get into better shape? Well, *slowly puts down donut* how about better financial shape? This week, Bytes is here with a special guide (we’ll see you Wednesday with a regular news update, too 😉) to help you learn how crypto can fit into your financial goals — from earning yield to filing taxes confidently. Let’s dive in.
How to bank with crypto. Four ways crypto can complement your financial goals.
Understanding crypto taxes. What you need to know about taxes if you explored crypto last year.
A hodler’s guide to retirement. Saving, hodling, and the importance of long-term thinking.
How to donate crypto. A simple tutorial for gifting crypto to nonprofits.
BANK ON IT
Can crypto replace your bank account?
Follow crypto for long enough, and you’ll likely run into the phrase “be your own bank.” That’s because crypto can give you more control over your finances — from saving for the future and earning interest to getting a loan — without a traditional bank in the middle. Increasingly, there are crypto-powered solutions to virtually all of your financial needs. Here are a few things to try:
Deposit some or all of your paycheck as crypto. A growing number of fintech and crypto companies like Coinbase enable direct deposits onto their platforms, making it simple to convert traditional payments into crypto. Using Coinbase to get paid in crypto — like NYC Mayor Eric Adams — is an easy, zero-fee way to add to your portfolio.
Staking can be a simple way to earn yield. With certain “proof-of-stake” blockchains (like ETH2), you can earn rewards for supplying some of your holdings to staking pools, which contribute to the security of a crypto’s network (it just takes a few taps on your phone). Currently, ETH2 staking yields 4.50% via Coinbase. (Like all areas of crypto, staking comes with risks, so be sure to do your own research.)
Use BTC to borrow without a credit check. Looking for a line of credit that doesn’t require heading to the bank or navigating more complicated DeFi apps? Residents of many U.S. states can borrow up to $1 million from Coinbase using BTC as collateral — no credit check required.
Send cross-border payments instantly and cheaply. Have you ever had to wire money abroad? It’s the worst — expensive and slow. Anyone in the world with a smartphone and WiFi can send and receive crypto instantly and cheaply, which is especially transformative if you regularly send money to family and friends internationally.
Why it matters… As crypto adoption continues to grow around the world, there are more options than ever when it comes to personal finances. New technologies like stablecoins, DeFi, and DAOs continue to emerge — each unlocking new opportunities to trade, save, invest, borrow, and more. What does that mean for you? More power over your financial future than ever before.
KNOW IF YOU OWE
Crypto taxes made easier
2021 was quite a year for crypto: Bitcoin met popular culture, NFTs landed on SNL, and a striking 16 percent of Americans took part in the cryptoeconomy. If you're one of them, you might be wondering if your foray into the cryptoverse will hit your tax bill come April. The answer? It depends. Crypto taxes can be tricky, even for seasoned professionals, but here are few basics you’ll generally need to know heading into this tax season:
Most types of crypto transactions are taxable events, each with its own set of rules and exceptions. If you sold, converted, spent, earned, or staked crypto, for example, you’ll need to report your transactions to the IRS.
The money you gain from crypto is taxed at different rates, either as capital gains or as income, depending on how you got your crypto and how long you held on to it, among other factors. The IRS treats selling crypto, for example, a lot like selling a stock — you’ll generally pay a lower rate if you held onto it for a year or more before you sold it.
Notably, converting crypto, like swapping BTC for ETH, is taxable. This is because you’ve technically sold your BTC to buy ETH, “realizing” either a gain or a loss. Same goes for spending. If you bought $10,000 of BTC and, after its value increased, used your BTC to buy a car worth $30,000 — that’s a taxable gain.
Simply buying crypto with cash isn’t taxable, so you won’t have to report it on your return. You also won’t need to report transferring coins between wallets you own or gifting up to $15,000 (for 2021) in crypto to a friend or family member. And if you’ve donated crypto directly to a 501(c)(3) charitable organization, you might even be able to claim a deduction according to the latest IRS guidance.
Why it matters… There’s so much more to crypto taxes, but this is a topic worth taking seriously. It’s important (and legally required!) to accurately report your crypto activity, so be sure to take a peek at your transactions, and consider which ones could have tax implications. If you’re a Coinbase user, check out our tax reports and tools, or use a trusted aggregator like CoinTracker. And if you’re having trouble navigating your tax situation on your own, please consult a professional.
MAKE A PLAN
A hodler’s guide to retirement savings
If you’re into crypto, there’s a decent chance you’re already thinking long term — the slang terms “hodl” and “diamond hands” didn’t come from nowhere. Crypto, even with some dips, has generally trended upward in the decade-plus that it’s been around — and in that time-frame has beaten virtually all other asset classes in terms of returns. But even if your crypto portfolio has performed well, it’s important to think about all the other parts of preparing for a comfy retirement. Luckily for you, Coinbase Learn has put together a comprehensive guide to retirement savings. Here are some key tips.
How do I calculate the amount of savings I’ll need? Chances are you’ve seen a figure (maybe $2 million) cited as the magic number a person needs to retire. But really, there is no magic number: in our guide we’ll help you determine how much you’ll need to put aside based on factors like your planned retirement age.
What if I’m only just starting to think about retirement now? Don’t panic, you aren’t alone! But get started now. What you’re looking for are compounding gains — or, in plain speak, the gains made by your gains. Einstein is often quoted as calling compound interest “the eighth wonder of the world.”
Is there a first step everyone should take? Get rid of credit card debt. Given that the current average interest rate on credit cards is over 16%, there is very little chance that any appropriately diversified retirement portfolio will come close to providing returns that will equal that number.
Max out tax-advantaged accounts first. Traditional 401(k)s and IRAs are both tax-deferred, meaning that you only pay taxes when money is withdrawn during retirement. Roth IRAs, on the other hand, are tax-exempt, meaning that funds invested in them will be taxed in the current year, but no further taxes will be assessed once funds are withdrawn in retirement — as long as certain conditions (including age requirements) are met.
Why it matters… Bitcoin, as the Economist recently put it, is an important part of a well-diversified portfolio. But for most people it’s not the only part. The best way to save for your future self is to start as early as you can, max out tax-advantaged accounts, and let compounding gains do much of the work for you. As the proverb says, “The best time to plant a tree was twenty years ago. The second-best time is today.”
GIVE IT AWAY
How to donate crypto to nonprofit organizations
As mentioned in the tax section above, charitable giving can confer significant tax advantages — and might be something you’re looking to do anyway. Some of the world’s biggest charitable organizations — including the Red Cross, United Way, Greenpeace, and the Electronic Freedom Foundation — now accept crypto.
You can also check out Daffy, which allows you to make crypto donations to more than 1.5 million organizations — with the nonprofits and charities you choose receiving the funds in cash.
For many more ideas, visit our guide on crypto giving:
TOKEN TRIVIA
What is capital gains tax?
A
A tax on profits you make from selling certain assets
B
A tax that applies to crypto transactions
C
A topic you should discuss with a tax professional
D
All of the above
Find the answer below.
Trivia Answer
D
All of the above
