What You Need to Know About Crypto & an Update On the WA State Capital Gains Excise Tax

What is Cryptocurrency?

Cryptocurrency, or crypto for short, is a type of digital currency that uses cryptography, which is the practice of writing or solving codes to protect secret information, secure and verify transactions, and control the creation of new units. Imagine you have a secret message that you want to send to your friend, to protect your message from being read by someone else you can use a code to make it unreadable. Your friend would need the key to decipher the code and read the message. In the same vein, only the owner of the cryptocurrency has access to their secret code or key, which is used to approve transactions on the blockchain.

The blockchain records crypto transactions on a decentralized public ledger. Think of the blockchain as a digital ledger that records all transactions that have ever occurred with a particular cryptocurrency. The blockchain essentially operates in a similar capacity to that of a bookkeeper, though the blockchain retains much more detailed and accurate information than would be possible for a team of bookkeepers. This makes the blockchain theoretically transparent, secure, and resistant to tampering.

New Capital Gains Tax for Washington State Residents

The capital gains tax is a 7% tax on profits over $250,000 from sales of certain long-term capital assets, such as stocks, bonds, business interests, or other investments and tangible assets. The tax applies only to the amount of profit that exceeds $250,000 in a calendar year, not to the total sale price. For example, if you sell a stock for $300,000 and your original purchase price was $100,000, your profit is $200,000 and you do not owe any capital gains tax. But if your original purchase price was $40,000, your profit is $260,000 and you owe 7% of $10,000, which is $700.

The capital gains tax does not apply to all types of capital assets or transactions. Some of the exemptions include sales of the following:

• Real estate, such as your primary residence or rental property
• Retirement accounts, such as 401(k), IRA, or pension plans
• Livestock, timber, or agricultural land
• Personal property, such as your car or furniture
• Assets of nonprofit organizations or charitable trusts
• Assets of certain small businesses with less than $10 million in gross income

While the newly imposed capital gains tax sets a dangerous precedent, it will not affect the vast majority of people as it is now. Planning around capital gains is already a core component of our strategy and this tax will only add an additional layer of consideration as we continue to strive towards the best outcomes for our clients.

The Value of Crypto

It is important to note that the value of cryptocurrency is not derived from an underlying asset such as stocks or bonds. Instead, the value of cryptocurrency is largely based on market demand and supply. The price of a particular cryptocurrency can fluctuate wildly depending on a variety of factors, including market sentiment, news events, and regulatory developments.

One reason that cryptocurrency has become so popular is that it is not tied to any particular government or financial institution, making it a more decentralized and potentially more stable form of currency. However, this lack of regulation and oversight also means that cryptocurrency is highly speculative and volatile, and its value can be subject to sudden and drastic changes.

Stablecoins

Stablecoins are a type of crypto that is designed to maintain a stable value. This is achieved by tying the value of the stablecoin to a real-world asset, such as the US dollar, gold, or oil. The idea behind stablecoins is to provide a more stable and less volatile alternative to traditional cryptocurrencies like Bitcoin.

Despite their “stable value”, stablecoins are not risk-free. They are still a relatively new and untested investment option, and there are concerns around their regulation, liquidity, and potential for fraud. Additionally, there is a risk that the real-world asset that the stablecoin is tied to may lose value, causing the stablecoin to lose value as well.

 

Our Investment Philosophy Remains Unchanged

Intended as a currency and treated as an investment by many, Crypto remains an “asset” that is entirely driven by speculation and momentum. Our perspective is that crypto should be avoided by investors, due to its lack of inherent value, extreme volatility, and lack of regulation.

We have significant reservations regarding the inclusion of cryptocurrencies, including stablecoins, in creating an efficient portfolio. We believe that the cryptocurrency market is still in its nascent stage and that the risks outweigh the rewards.

As a general rule of thumb, if an investment strategy or asset cannot be accurately described in a few simple statements, as to how it adds value, it is probably best described as a speculative investment.

– From your team at McIlrath & Eck

There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Diversification does not eliminate the risk of market loss.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services