Ultimate Crypto-Friendly Intro to Personal Finance

New to personal finance? We offer a crypto-friendly intro to taxes, retirement savings, credit building, and more.

Zac McClure
ByZac McClure, MBA Expert reviewed byAndrew Perlin, CPAUpdated on September 2, 2022 · minute read

TokenTax content follows strict guidelines for editorial accuracy and integrity.

At TokenTax we do crypto taxes. But we often discover that we’re also some clients’ first foray into personal finance as a whole. It makes sense: crypto is a market where traders can amass (or lose) wealth quickly, and also one that has a high concentration of younger investors. 

We’d never try to convince our degen friends to stop pursuing lucrative opportunities, but we do try to educate them on the basics of personal finance, so they can better weather market downturns and save for the future. All good investors recognize the importance of a diverse portfolio.

In this guide, we’ll go over the basics of taxes, retirement savings, credit cards, and making sure you get the most out of your money. Read on, friends: 

Planning ahead for your crypto taxes

You can find a wealth of information about crypto tax topics on our blog, but here are the basics. 

You have to pay your taxes. The IRS can track DeFi transactions. If you don’t file taxes (or don’t file in good faith), you may be audited by the IRS, you could get fined, and you could even potentially face jail time. We recommend you use crypto tax software to make the process way easier.

We encourage you to read our more in-depth guides on crypto tax calculation and crypto tax reporting, but here are a few of the most important tips:

Hold your assets longer than a year

Crypto long-term capital gains rates (for assets held more than a year) are lower rates than short-term capital gains rates (for assets held a year or less)

Tax loss harvest

Selling assets at a loss allows you to realize the loss so that you can use it to offset your gains. People typically do this during market dips or at the end of the year. If you’re tax loss harvesting in December, you must make all your sales before the calendar year ends. Note that are also unique challenges involved in NFT tax loss harvesting, including estimating a fair market value and realizing a loss on worthless tokens.

TokenTax's tax loss harvesting dashboard is a great way to maximize the value you can gain from this strategy.

Use specific ID accounting

You can select the method of specific ID accounting (FIFO, LIFO, HIFO/Minimization) that works best with your tax strategy. By using different criteria to pair up acquisitions and sales, these methods can change your tax liability for a given tax year. For example, the TokenTax Minimization algorithm will work to lower your liability in the tax year at hand.  

Put aside funds to pay your tax bill

Crypto markets are volatile. While you may have plenty of liquid funds in November, the situation could be very different in April—but your tax payment will still be due. It’s good practice to save money during the year so you’re not left in the lurch at the tax deadline. If you buy our crypto tax software at the start of the tax year, you can track your potential liability as the months pass, so you can save enough and tax loss harvest. 

Remember that only $3,000 of ordinary income can be offset with capital losses

If you are doing a lot of mining or yield farming, it’s a good idea to immediately convert some portion of your rewards to a more stable asset (like stablecoins). If you have capital gains in excess of your capital losses, you can offset them with your crypto capital losses. If your losses are more, you'll only be able to offset $3,000 of other income with your losses. The rest will carry forward.

Saving for emergencies, purchases, or for future taxes

Saving money is good; having those funds readily available will help you stay prepared for emergencies, market downturns, and yes, your taxes (see point above). 

Try to save two months’ worth of expenses

Many financial advisors suggest that individuals have at least two months’ worth of living expenses in a savings account from which funds can be easily withdrawn. Two months is the goal; save as much as you can. 

Convert crypto savings to stablecoins

If you want to keep your savings as crypto, it’s a good idea to convert assets to stablecoins to ensure the value of your savings remains constant. This of course isn't without any risk, as it won't be FDIC insured, but it should be much less volatile than other crypto.

Saving for retirement

Saving for retirement is a little different than saving for emergencies or large purchases. Contributing to a retirement account like an IRA or a 401K comes with tax benefits, but it does mean that in most cases, you can’t withdraw your funds before you're 59 1/2 without a rather stiff penalty

A quick explainer: 401ks are retirement funds offered through an employer, while IRAs (individual retirement accounts) are not connected to your employer. In 2022, the yearly contribution limit for 401ks is $20,500. For IRAs, it is $6,000 for those under 50 and $7,000 for those 50 and up.  

IRAs can be brokerage accounts or self-directed (SDIRA). In brokerage accounts, you are limited to investing in assets that can be traded by brokerages, while in SDIRA accounts you can invest in other asset types, such as crypto. 

When it comes to tax, there are two common types of IRAs:

Traditional IRAs

Contributions are tax-deductible. You will owe income taxes on the balance when you withdraw it for your retirement. If you want to experience tax benefits now, this might be right for you. 

Roth IRAs

Contributions are not tax-deductible. However, you also don’t owe tax on the balance when it is withdrawn for your retirement. If you want to experience tax benefits later, this might be right for you. 

There are more and more crypto IRAs, which let investors buy crypto with their IRA. While ultimately the proportion of crypto assets to traditional assets in your account is up to you, financial advisors typically advise younger clients to make higher-risk investments than they do older clients. As your phase of life changes, it’s good to re-evaluate the level of risk of the assets in your IRA. 

Building credit as a crypto investor

It can be a little tricky to build credit if a large portion of your assets are in crypto. However, it’s important that you do, so that you don’t face hurdles when trying to rent, get a loan, or get a mortgage. 

In the U.S., our credit is measured by our individual credit score, which credit bureaus calculate based on our bill-paying history. Scores range from 300-850, with 850 being the highest. 

Although it may seem counterintuitive, in order to build credit, you have to take on debt. A history of paying rent and utilities builds your credit score, but to get into the highest range, it is helpful to get one or more credit cards and/or take out a small (non-crypto) loan—with the important caveat that you pay off debts promptly and in full every month. If you have bad/no credit and can’t get a credit card, many financial institutions issue starter credit cards that require upfront deposits but allow the user to build credit. 

Securing a mortgage as a crypto investor

Lenders require a lot of financial documentation before approving major loans like a mortgage. This can be challenging for crypto investors, since traditional financial institutions are not accustomed to reviewing data from exchanges. 

From those we’ve talked to who have used crypto as assets when getting a mortgage, we’ve found that:

  • Lenders require PDF print outs to validate wallet ownership and balances

  • Lenders prefer centralized exchanges over decentralized exchanges

  • For your down payment, convert crypto assets into fiat in your bank account at least a month before you need to make the payment 

Investing smarter

Diversify your portfolio

One way to spread your risk around is to diversify your investments. In short, you don’t want to put all your eggs in one basket. 

A simple way for beginning investors to diversify traditional investments is to buy low-cost exchange traded funds (ETFs) in different asset classes: equity, bonds, real estate, currency, and the like. This means that not only does the investor gain exposure to different types of assets, they also get exposed to different securities. Now there are even bitcoin ETFs.

Look into passive investing 

Passive investing minimizes buying and selling, preferring to gradually increase wealth rather than bet on major gains that stem from market fluctuations. Essentially, it’s a HODL strategy. 

Index funds are a popular, non-crypto form of passive investments. Oftentimes, a passive investment strategy will outperform active trading after taxes, although some may argue that it limits the potential of huge returns. 

Passive investing has a few advantages: 

Earning passive income

You want to make your money work for you; buying and selling isn’t the only way to earn (in either the crypto or traditional market). Passive income refers to earnings from a steady stream of income with little or no daily effort from the earner. 

DeFi staking and lending

If you’re a big crypto trader, you’re familiar with DeFi staking and lending, so we won’t bore you with an explainer. 

We will add, however, that the safest way to participate in these passive income opportunities is by staking or lending stablecoins. If you lock up altcoins in a crypto lending platform, you won’t be able to remove them if their price rises or drops dramatically, meaning you wouldn’t be able to sell them to realize crypto gains or losses

High-yield savings accounts

High-yield savings accounts won’t earn you the kind of money that DeFi platforms may, but getting one is a low-effort, low-cost way to ensure a small amount of recurring income. We’ve already encouraged you to get a savings account, so why not try to find one with the highest yield? 

Interest rates are rising, but overall, they are still at historic lows. However, you can find savings accounts offering up to .65% APY, which will net you a very modest sum, but still more than nothing. 

Crypto estate planning

Given the pseudonymous and decentralized nature of the blockchain, it can be quite difficult for your loved ones to find and distribute your digital assets in the event of your death. To ease their experience—and to ensure your assets are distributed according to your wishes—we recommend you think about your crypto estate plan.

Central to crypto estate planning is record-keeping. Make sure that your executor/ successor trustee has not only a summary of all your digital assets, but also instructions on where they're located and how they can be accessed. This includes wallet addresses, passwords, seed phrases, and private keys.

For more, including guidance on setting up trusts, read our Intro to Crypto Estate Planning.

Miscellaneous personal finance hacks

Consider Crypto.com debit cards

Crypto.com debit cards offer very attractive rewards structures, particularly as you move into the higher tiers and if you stake CRO, Crypto.com’s token, for at least 6 months. These rewards include paid streaming subscriptions, discounts on holiday bookings, and airport lounge access, but they also include CRO staking rewards of up to 8%. 

Maximize your credit card rewards

If you have the credit score and assets to allow you to do so, it’s smart to shop around for the credit card with the best rewards, which might include cash back, airline miles, discounts, reimbursements, travel perks, purchase protections, travel insurance, and more. 

Look for cards that reward your interests. Do you spend a lot on dining out? Find a card with extra cash back on restaurants. Do you like traveling? Find cards with rewards in the form of airline miles or booking discounts. Websites like Nerdwallet or Bankrate can help you compare cards and find what’s best for you. 

Crypto traders might be interested in credit cards with crypto rewards, such as the BlockFi rewards credit card, which gives 1.5% cash back in crypto. 

Be careful with crypto loans

If managed properly, receiving a crypto loan is not a taxable event. This means that if you wanted to make a large purchase, but not cash out your crypto holdings, you could instead use them as collateral for a stablecoin loan. Provided the terms of the loan are met, upon paying back your loan, you’ll still have the crypto assets you used as collateral and will not have realized any taxable events.

You should be careful with this strategy, however, because the volatility of crypto markets can lead to margin calls, which if not met, can end with forced liquidations. If you experience a forced liquidation, you will still be liable for any taxes on the sold asset, even though you didn’t receive the proceeds of the sale. 

To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

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Zac McClure
Zac McClureCo-Founder at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.
Andrew Perlin
Reviewed byAndrew PerlinAccounting at TokenTax
Andrew Perlin is a CPA specializing in crypto taxes. After working as a financial controller, he co-founded CryptoCPAs, which was acquired by TokenTax in 2018.

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