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The 2022 crypto price crash understandably has some investors concerned. But for those of you who haven't run for the hills, it's worth knowing that cryptocurrency currently has the attention of not only the Biden administration, and Congress, but the IRS as well. In terms of crypto news and taxes, the IRS recently proposed changes to cryptocurrency tax reporting question on the Form 1040. The agency will also receive $80 billion from the Inflation Reduction Act, some of which will be directed to digital asset enforcement—including cryptocurrency tax compliance.
Additionally, you may have heard that the IRS continues to successfully obtain court orders to require cryptocurrency brokers and exchanges to provide information to the IRS. That information concerns investors who failed to report and pay taxes on cryptocurrency transactions.
And while this IRS enforcement focus isn't new, recent crypto announcements and developments from Congress, the Biden administration, and the IRS, mean that it's important to stay up-to-date on crypto tax reporting and compliance. So, here's some information to get you started.
How Crypto is Taxed
A common question about cryptocurrency concerns how crypto is taxed. The answer is that cryptocurrency is considered property, so it's taxed by the IRS in the same way that other capital assets are taxed. As a result, when you sell or trade crypto, you can have asset losses and potential taxable gains depending on the fair market value of the virtual currency, and your basis in the crypto.
SEE MORE 9 Ways to Cut Crypto Taxes Down to the Bone
Given that, it
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Editor's note: This is part six of a seven-part series. It dives more deeply into the second strategy for defusing a retirement tax bomb, implementing asset location. If you missed the introductory article, you may find it helpful to start here.
Most investors have heard of asset allocation, but asset location is another story - and it could help investors with large tax-deferred savings reduce their tax bills in retirement.
SEE MORE When It Comes to Your RMDs, Be Very, Very Afraid!
Asset allocation refers to how a portfolio is allocated to various asset classes that have different historical investment returns and standard deviations. The simplest example is a stock-bond allocation, such as a 60% stock, 40% bond allocation, which is a common allocation for retirees. But there are dozens of more granular asset classes that can be managed as well, for example, U.S. large cap stocks or international small cap value stocks. Asset allocation is critical to effectively diversify your portfolio and reduce risk.
Asset location is different portfolio management strategy: one that few clients I meet have heard of. Few financial advisers implement it as well. Asset location seeks to minimize taxes by placing different asset classes in specific tax buckets (taxable, pre-tax, tax-free).
Putting Asset Location into Practice
In a nutshell, here's how asset location works:
Typically, you want to place investments with low expected returns, such as bonds, into tax-deferred accounts.Place investments with high expected returns, such as small value or emerging market st
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