Did you know that a Hard Fork occurs when one group within a network changes the rules, while another group in the network stays with the old rules. The two groups are then no longer compatible. An Airdrop, on the other hand, occurs when distributions are made to one or more individuals in a network. Both are fully taxable events. Got it?
“What in the world is he talking about?” you could reasonably ask. The simple answer is virtual currencies (a/k/a: “crypto-currencies”). Most of us know about Bitcoin, but there are in excess of 1,900 cryptocurrencies in the world today. There are also several cryptocurrency billionaires, and they are now all subject to scrutiny by various taxing authorities. Crypto transactions are often intentionally “off-the-books,” and are rarely reported to taxing authorities. Those authorities understand that fact, and they are not letting it go unnoticed.
Over the years, many of you have heard us explain that Van Wie Financial does not invest money, whether our own or that of our clients, in any vehicle that we cannot explain to a 12-year old in 5 minutes. From the start, we were suspicious of the very cryptocurrency concept, and our intuition cautioned us that IRS was going to get very interested in what was going on in the crypto world. Our feeling has long been that taxes were being conspicuously avoided through crypto transaction secrecy, and that IRS would eventually begin a deep dive into crypto-currency tax evasion. It has begun.
As financial advisors, we would never even consider crypto as a suitable investment. A client or potential client who wants to dabble in crypto will have to do so on their own. We have no expectation that this situation will change any time soon.
If you can explain the difference between a Hard Fork and an Airdrop, and if you believe that you can make money from cryptocurrency, approach it cautiously. But if you believe that crypto transactions will benefit your tax situation, whether federal, state, local, or international, please take our advice -- divulge every transaction that you make to your tax preparer.
For anyone who is on the fence regarding crypto “investments,” we have a suggestion. Find a 12-year old and attempt to explain cryptocurrency to him or her. If they look at you with a blank stare, concentrate on more traditional investments. Meanwhile, until you can distinguish between a Hard Fork and an Airdrop, we suggest that you avoid the cryptocurrency temptation.
Van Wie Financial is fee-only. For a reason.