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The Ultimate Cryptocurrency Tax and Financial Planning Guide

Investors who hold significant cryptoassets (i.e., whales) need to understand tax planning, risk management, and other financial strategies to ensure they’re getting the most out of their investment. But this is difficult to do when much of the world, from the IRS to your local financial advisor, is still figuring out how to react. 

In this guide, we lay out everything that goes into financially managing cryptoassets, from basic ways to invest to the sticky realities of taxes and portfolio diversification. Here’s the ultimate cryptocurrency tax and financial planning guide.

Ways to invest in crypto

Cryptocurrency is a compelling investment for several reasons. When you’re getting into crypto, it’s important to understand the benefits and the many ways you can invest.

Benefits of crypto

Cryptocurrency is a digital asset that removes middlemen like banks and payment processors and offers pseudo-anonymity to its users. Blockchain technology, the distributed ledger that maintains decentralized transaction records, ensures the fidelity and security of transaction records with no need for a third party. No single person or group has control. The benefits of crypto include: 

  • There is a potential for high returns.
  • Transaction fees can be significantly lower than banks or credit card companies.
  • Crypto is resistant to seizure by the government.
  • You can transfer cryptocurrency to anyone in the world over the internet.
  • The decentralized nature of blockchain technology helps protect your unspent coins from bad actors.
  • Most cryptocurrencies have a limited supply known as a hard cap or they burn tokens, which essentially takes the token out of circulation. This makes it impossible for the government to dilute cryptocurrency’s value through inflation. 

Of course there are downsides, the biggest being that crypto is volatile, difficult to predict, and subject to quick price fluctuations. Government regulations are limited, which means there are fewer legal protections for investors. Transactions are irreversible and assets can be lost if the user loses their key. And crypto isn’t universally accepted, which limits where you can actually spend your currency.

Ways to invest

There are many ways to work crypto into your portfolio, and not all of them involve buying cryptocurrency directly. Here are some of the ways you can invest or earn: 

  • Purchasing cryptoassets directly is the “traditional” method. You can buy coins through an exchange or buy non-fungible tokens (NFTs). 
  • Buying shares of publicly traded companies with a financial stake in the future of crypto. These businesses may work in the crypto industry, hold cryptoassets, or accept cryptocurrency payments.
  • Investing in index funds or mutual funds that contain companies with crypto interests. This helps maintain a balanced portfolio and it's less risky than investing in individual companies or cryptocurrencies.
  • Investing in a spot Bitcoin ETF such as BlackRock's IBIT.
  • Investing in Bitcoin Futures ETFs, which hold contracts to buy or sell coins in the future at a predetermined price.
  • Investing in the Bitwise 10 Crypto Index fund, which contains a mix of cryptocurrencies that seeks to track the ten largest cryptocurrencies on the market.
  • Putting your money in actively managed crypto hedge funds that either exclusively contain cryptoassets, or mix cryptocurrencies in with other asset types.
  • Finding ways to invest in the crypto industry through venture capital funds, becoming an angel investor, or participating in crowdfunding projects.
  • Borrowing money against your crypto holdings through an exchange. You might be able to access attractive interest rates using your crypto as collateral and avoid creating a taxable event. You can also go directly through a lender. Just be careful about margin calls which is when the value of your collateral goes below a specific threshold and the borrower requires you to post more collateral in order to keep the loan outstanding or sells your crypto to cover the deficit.
  • Lending your cryptoassets out, and earning interest from borrowers, through crypto exchanges that act as intermediaries. However, you should be aware that there's counter-party risk which means that the borrower or exchange might not give you back your crypto.


Crypto is treated as property for tax purposes, but the rules and guidance can frequently change because the crypto space is constantly evolving and the tax authorities are trying to keep up. You need to pay close attention to the value of your crypto when you purchase it and whenever a taxable event occurs. On top of that, there are some sophisticated strategies you can use to reduce your tax liability. Here are some of the factors that go into tax planning for crypto.

Taxable events

You must report taxable events like selling cryptocurrency for fiat currency, trading cryptocurrency for another cryptocurrency, using cryptocurrency to buy a good or service, selling or trading an NFT, or receiving cryptocurrency as payment for services. 

If your cryptoasset decreased in value from the time you purchased it to the time of the taxable event, you experienced a loss and that offsets your other gains for the year. If the value is higher, you will owe capital gains tax on the profit. 

Events that are not taxable include buying cryptocurrency or an NFT with fiat currency, donating cryptocurrency to a tax-exempt organization like a nonprofit, gifting up to $17,000 for 2023 in cryptocurrency, or transferring cryptocurrency between wallets.

Tax lot ID methods

The taxes you owe on the sale, trade, or exchange of cryptocurrency depend on what you paid for the unit when you purchased it (the cost basis), the value of the unit when the taxable event occurred (your proceeds), and the difference between the two (your gain or loss). 

The tax lot ID method you choose determines which crypto unit(s) you disposed of for tax purposes. It pays to choose the method that minimizes your gains, but you also may opt for the easiest accounting method. 

  • First-in-first-out (FIFO): the oldest unit in your wallet is the first unit counted as sold. This is considered the easiest and most conservative accounting method.
  • Last-in-first-out (LIFO): the newest unit in your wallet is the first unit counted as sold. LIFO can yield better results if prices have steadily risen over time.
  • Highest-in-first-out (HIFO): the unit with the highest cost basis is the unit counted as sold. HIFO can create significant tax savings, especially if you have many taxable events. 

LIFO and HIFO are specific identification methods. If you use one of these accounting methods, you must keep records of the following details:  

  • The date and time you purchased each unit.
  • The cost basis and fair market value of each unit at the time of purchase.
  • The date and time the unit was sold, exchanged, or disposed of.
  • The fair market value of the unit at the time it was sold, exchanged, or disposed of.
  • The value of the cash you received or the property you received for the sale. 

You can change your accounting/reporting method from year to year, but you must be careful to avoid errors that could trigger scrutiny from the IRS. Consult a tax professional before you change your crypto accounting method.

Short-term vs. long-term capital gains

If an investor holds a cryptoasset for more than a year before selling or exchanging it, the investor realizes a long-term capital gain or loss. If the asset is held for a year or less, any gain on the sale is taxed at the short-term rate, which is the taxpayer’s highest marginal tax rate. Investors can realize lower tax rates by holding their cryptocurrency assets for more than a year before selling them.

Tax loss harvesting

With tax loss harvesting, you sell cryptoassets that have fallen in value at a loss and use the proceeds to reinvest in other areas (or the same cryptocurrency). The loss created by the sale reduces the capital gains you owe from other more profitable transactions. You must first offset capital gains with the same type of losses - short-term losses offset short-term gains and long-term losses offset long-term gains. Any remaining short-term gains or losses are then netted against any remaining long-term losses or gains, respectively.

Unlike other securities, cryptocurrency isn’t bound by the “wash-sale rules,” which dictates that you can’t claim a loss on the sale of a security if you buy the same, or practically identical, asset within 30 days before or after the sale. Lawmakers have considered closing this loophole, but so far that hasn’t happened. 

Whether or not it makes sense to actually sell crypto at a loss purely for tax purposes depends on many factors, but tax loss harvesting is a viable strategy for many. To take advantage, you must keep careful track of your crypto purchases and how their value fluctuates over time so you can target the ones that have decreased in value below their original cost basis.

Charitable giving

Taxpayers can generally take itemized deductions on cash donations to eligible organizations, such as nonprofits, thus reducing taxable income. However, the tax deductions are subject to limitations based on income and depend on whether the total of all itemized deductions are greater than the standard deduction. Donating crypto is a little more complicated. If you cash out your cryptocurrency and donate the proceeds, any profits you make from the sale are still subject to capital gains tax. 

For that reason, it’s preferable to donate crypto directly and avoid taxes entirely. But most charities won’t accept direct donations of cryptocurrency, or they’ll only accept donations through a third-party processor or donor fund. If you’re preparing to donate your crypto, make sure you find organizations that will accept the donation. 

NFT sales

The IRS hasn’t yet stated how they will treat proceeds from the sale of NFTs. Many tax experts believe that NFTs will be treated as collectibles, within the same group as art, antiques, stamps, classic cars, and the like. 

Collectibles carry a higher maximum long term tax rate than cryptocurrencies (31.8% is the top federal tax rate on collectible earnings, compared to 23.8% for cryptocurrency). Until the IRS officially weighs in, collectors will have to wait for guidance and make sure they keep careful records of all NFT transactions.

Earning cryptocurrency

If you receive cryptocurrency from mining, lending, a promotion, or as a payment for goods or services, it should be reported as ordinary income which is taxed at your highest marginal rate.

But one area that requires more clarification is staking, where investors lock up their crypto holdings for a limited time in exchange for a percentage-based reward, similar to how you earn interest on money kept in an interest-bearing savings account. Cryptocurrencies that allow staking, like Ethereum and Cosmos, do it because it helps maintain the blockchain.

The IRS hasn’t issued guidance on how earnings from staking will be taxed, but the general perception is that it will be taxed as ordinary income when received, while taxable events–such as the sale of the coins you earn–will be subject to capital gains. 

Loss from the sale of personal use property 

If you use cryptocurrency to directly buy personal-use property–such as a car, home, appliances, clothes, and more–from a seller that accepts it, you should know that any loss from the sale of that personal-use property is not deductible, so it won’t reduce your tax liability.

For that reason, it’s generally not a good idea to use crypto (especially crypto that has inherent tax losses) to purchase these types of goods directly. You’re better off selling crypto at a gain and owing taxes, or at a loss and reducing your gains, by exchanging it for fiat currency and then using that currency to buy property. 

Why? If you use crypto to buy personal-use property, then the crypto could be deemed personal-use property by extension in the eyes of the IRS. This is potentially a gray area, so it’s best to play it safe and not use your crypto to buy mansions and Lambos. Convert the crypto to cash and then you can buy that Patek Philippe 175th Commemorative Collection Grandmaster Chime wristwatch your heart’s been set on.

Qualified opportunity funds

Qualified opportunity funds are investment vehicles organized as corporations or partnerships, for the purpose of investing in Qualified Opportunity Zone (QOZ) properties. These are mainly real estate or business development opportunities in areas, known as opportunity zones, that are designated as economically distressed. 

Selling your cryptoassets and investing the proceeds in a qualified opportunity fund allows you to dispose of cryptocurrency and defer capital gains tax. If you hold the qualified opportunity fund investment for five years, you’re eligible for a 10% exclusion of deferred capital gains in the fund. If you hold it for seven years, that exclusion goes up to 15% (please note that the deferral ends on December 31, 2026, so if you make the investment in 2022 or thereafter, you will not be eligible for these exclusions). In tax year 2027, you would report the deferred gains on your return less any applicable exclusions, and if you hold the QOZ investment for ten years, you can exclude 100% of the capital gains generated by the QOZ investment. 

In this way, investors can sell off cryptocurrency, reinvest in another area, defer recognizing gains, and even potentially reduce their tax bill if they hold the investment long enough!

Low-rate tax jurisdictions

If you’re a U.S. citizen, it doesn’t matter where you live - your worldwide income is subject to federal taxation. But at the state level, you can reduce your tax liability by residing in one of the states that has no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. 

If you’re willing to take drastic measures to avoid U.S. taxation, you could look into renouncing your U.S. citizenship and moving to a tax-friendly nation, like the Bahamas. Or you can establish tax residency in Puerto Rico, where income earned in Puerto Rico is exempt from U.S. taxation. 

Withholdings and quarterly tax payments

When you trade crypto throughout the year and realize gains without paying taxes, you could get hit with a big bill when you file your tax return. You may even owe interest and penalties for the period the IRS deems you should have been paying taxes. 

If you work for an employer and receive a W-2 statement, one strategy you can use is to increase your withholdings and contribute a bigger chunk of your paycheck toward taxes, reducing the amount you’ll owe when you file your tax return. 

Alternatively, you can make estimated quarterly payments to the IRS based on your earnings. The IRS says that any taxpayer expecting to owe more than $1,000 when they file their tax return should pay quarterly taxes. If you fail to do so by the quarterly deadlines, you could be hit with a penalty when you file your tax return.  

Crypto portfolio tracking

If you only have a handful of transactions to report, or if all your taxable transactions were trades made through an online exchange, reporting to the IRS should be fairly simple. You can track transactions yourself or use the exchange to track the activity for you. Starting in tax year 2023, U.S. based exchanges will be required to report income and send 1099-B forms to their customers and the IRS.

But if you have large holdings or lots of transactions, engage in staking or mining or DeFi, move currency between wallets, or have holdings in many different places, tracking your crypto activity becomes more difficult.  

Crypto exchanges like Coinbase have built-in solutions that help users track and report their crypto earnings and losses. But if you moved cryptoassets into your account from somewhere else, they won’t know the original cost basis. And if you use multiple wallets or exchanges, gathering your data together may be cumbersome. 

Crypto portfolio trackers like CoinTracker, TokenTax, or ZenLedger are worth a look. You can sync multiple wallets and exchanges to a single tracker. They monitor purchases, track price changes, show the full value of your portfolio, and record prices every time you initiate a transaction. They can follow the accounting method you use, whether it’s FIFO, LIFO, or HIFO. Some can even help you pre-fill many of the IRS forms you’ll need.

Retirement planning

Investors with significant crypto holdings should consider how those assets fit into their retirement plan. Crypto can be one part of a broadly diversified retirement strategy, but it must be managed correctly to account for risk. Here are some of the ways you can incorporate crypto into your retirement planning.

Asset location

When it comes to retirement planning, you need to put your assets in the accounts that most benefit you. Choosing the right location for your assets matters because it affects the way your assets, and their earnings, are taxed. 

Placing crypto in a Roth account allows your assets to grow tax-free as long as you properly manage distributions from the account. On the flipside, if you have a tax-deferred account your distributions will be taxed at your highest marginal rate.

Self-directed individual 401(k)s and Self-directed Individual Retirement Arrangements

If you are self-employed or you have a small business with no full-time employees other than you and your spouse, you can open a self-directed solo/individual 401(k) and choose your own mutual funds, stocks, and bonds rather than selecting from the menu of options provided through an employer-sponsored 401(k). You can start fresh with your retirement savings by making contributions, and/or roll your existing tax-deferred retirement accounts into a new self-directed plan. 

You can also open a self-directed IRA (SDIRA) that allows alternative investments through a qualified IRA custodian, regardless of your employment status. Some self-directed i401(k)s and SDIRAs allow alternative investments including cryptocurrencies. But you’ll need to find a plan that allows it, as many of the big financial institutions don’t provide direct access to crypto. Your investments will receive the same tax benefits you’d get from more traditional retirement plans. 

Just because you’re directing the plan yourself doesn’t mean you can do whatever you want with it and avoid taxes. In Andrew McNulty et al. v. Commissioner, IRA owners used their SDIRA to invest in an LLC, then directed the LLC to buy American Eagle coins which they then took possession of. The courts ruled that by having unfettered control of the coins a taxable event occurred. Taking this a step further, if you buy crypto through an SDIRA and you control the private keys, then you too might be deemed to have unfettered control and thus trigger a taxable event.

It’s also worth noting that investing in collectibles via an IRA can also trigger a taxable event, so don’t buy NFTs using your IRA money.

Employer 401(k)s

Fidelity announced that it is adding bitcoin to its 401(k) plans, the first time a major retirement plan provider has offered crypto as an investment option. If employers choose to offer this option, they can allow their employees to put up to 20% of payroll contributions toward bitcoin (or set a lower cap as they see fit). 

Up to 20% of the employee’s plan can be held in a “digital assets account,” a custom account that contains bitcoin. Bitcoin investments will be treated like any other option on Fidelity’s investment menu, and the same tax benefits will apply. Whether or not employers decide to adopt bitcoin as a 401(k) investment option, however, remains to be seen.


Health savings accounts (HSAs) are savings accounts that let you set aside money tax-free for qualified medical expenses like doctor visits and prescriptions. You qualify to open a HSA if you have a High-Deductible Health Plan (HDHP), which in 2023 is a plan with a minimum deductible of $1,500 for an individual or $3,000 for a family. 

Many people use HSAs for retirement savings because account balances beyond a certain threshold can be invested and account balances can be carried over year to year. Contributions, earnings, and withdrawals for eligible expenses are 100% tax-free. Once you turn 65, withdrawals can be made for nonmedical reasons with no penalty, but will be taxed. 

There are some self-directed HSAs with crypto options out there, but you may have to pay high fund fees compared to more traditional offerings such as ETFs or mutual funds.

Education planning

Education savings plans like 529s and Coverdell ESAs let you contribute after-tax dollars, up to an annual limit, to invest and save for your child’s education. Contributions grow tax-free and withdrawals are tax-free as long as they’re used for qualified educational expenses like tuition, room and board, books, and school supplies.

529 plans don’t allow direct access to digital assets, but certain self-directed Coverdell ESA providers will let you buy crypto. You can contribute up to $2,000 per student, per year to a Coverdell ESA, subject to income limitations.

Risk management and insurance

Cryptocurrency has the potential for large gains, but the tradeoff is high volatility and risk. The following strategies can help you mitigate risk and protect your cryptoassets.


Hedging is a risk management strategy in which you take a position opposite, or unrelated to, an investment you already hold to offset potential losses. There are several ways to hedge against crypto risks. 

  • Portfolio diversification: every portfolio should contain different types of investments and securities, rather than just focusing on crypto. You can also hedge within your crypto holdings by purchasing various types of currency, rather than only owning a single type. But remember that diversifying your cryptoassets to mitigate risk is difficult because cryptocurrencies tend to fluctuate in tandem. 
  • Short-selling assets: you can borrow cryptocurrency from an exchange or broker and sell it when you think the value is about to fall, then repurchase the same amount of currency and return it after the price drops. If you pull it off successfully you can pocket the profit. But this requires sophisticated trend analysis and if you’re wrong and the price increases, you can lose money. 
  • Derivatives: derivatives are contracts that derive their value from an underlying asset like futures, a contract between parties that agree to trade cryptoassets at a predetermined price on a specified future date. You can mitigate risk by taking short future positions for falling prices, and profit when prices increase by taking long future positions. 

Hedging requires implementing carefully researched strategies, gradually increasing your hedged positions as you gain confidence. But hedging also comes with inherent risk - there is no guaranteed way to predict whether a specific asset will rise or fall as you anticipate it will. 


Crypto lacks many of the federal protections and regulations that apply to banks and traditional securities. For people who want to protect their assets from theft, hacks, or other disasters, insurance can provide some peace of mind. While it’s still an emerging industry, a few crypto insurance companies have sprouted up and some existing players may start offering policies. 

The amount of coverage you can actually purchase as a user may be limited. Some insurers offer policies to the crypto wallet and exchange companies themselves, covering crime and theft, custodial insurance coverage, and business development. In the future, this type of insurance may roll in decentralized finance (DeFi) insurance which covers losses caused by lost keys or service provider shutdowns. 

But a company named Breach now offers regulated insurance directly to crypto investors, covering many types of coins stored in certain exchanges (but not third-party wallets) against hacks and exploitation, from $2,000 to $1 million in losses. 

Then there is Nexus Mutual, which offers a decentralized approach to insurance by allowing members to join a risk-sharing pool owned by the members. Coverage protects against de-pegging, hacks on a specific protocol, and halted withdrawals or haircuts on funds stored in centralized exchanges. 

Remember that wallets and exchanges may offer you some built-in coverage. Many wallets insure against theft and loss, but not all do. Coinbase carries a $255 million crime insurance policy that covers major cybersecurity breaches, but can’t help you if a hacker accesses your personal account because you lost your credentials.

Estate management

Anyone with significant cryptoassets needs to think about estate planning and passing on cryptoassets. When it comes to crypto, planning ahead is crucial.


When you give cryptocurrency to anyone, remember to document the cost basis. You’ll want to give the recipient supporting documentation including the fair market value on the date you transferred it to them. They won’t owe income taxes when they receive the gift, but they will if they ever sell, trade, or otherwise exchange the currency. You should keep this information for your own records as well, but remember that gifts of $17,000 USD in 2023 or less, per person, are not subject to gift taxes.

Estate planning

Having large crypto holdings can make estate planning a headache. Because crypto is classified as property it will go through probate, the court-supervised process of administering your estate, if you haven’t made other arrangements. And many crypto exchanges may not allow you to add beneficiaries for your crypto accounts, or add joint ownership so a survivor can access your assets. 

Make sure that you include instructions for your crypto in your estate plan. Because cryptocurrency is decentralized, your survivors won’t just be able to go to the bank and ask if you had any. Create a list of your assets and share that list with the executor of your estate or a trusted family member. You may also want to give a trusted loved one access to your wallet, or see if the exchange or wallet has a process in place for deceased users. 

For example, Coinbase has a process to transfer assets to a beneficiary named in your estate plan. But they’ll need a copy of the death certificate, estate plan or probate documents, photo ID from the beneficiary and a signed letter from the person named in the probate documents advising Coinbase what to do with your account. 

If you have cryptocurrency that has significantly gained value since you purchased it, this could be an important asset to leave your heirs. If they sell the crypto soon after you die, they won’t owe capital gains tax on the proceeds. 


You might also want to establish a trust, an estate planning tool that lets you transfer property to your loved ones without going through probate. Probate can be a lengthy process if you have a large estate, complex estate plan, or someone contests your will. Because of the volatile nature of crypto, your assets could be worth significantly less by the time probate concludes and your beneficiaries receive them. 

Assets named in a trust avoid probate and can immediately be distributed according to your wishes. Trusts also maintain privacy because the assets named in them aren’t listed in your will, which is a matter of public record. You can designate a successor trustee to manage, access, and distribute your assets as you wish.

Trusts can also be a good way to mitigate estate taxes. They are also really good crypto wealth transfer vehicles that allow you to control what heirs can do with that wealth.

Private placement life insurance

Private placement life insurance (PPLI) is a niche insurance solution for wealthy individuals in high tax brackets. These policies have high cash values but relatively low death benefits, and allow policyholders to quickly build up cash with tax-free income and gains from the underlying investments contained within the policy. The ultimate goal is tax-advantaged wealth accrual, not death benefits. 

Clout Capital now offers PPLI with a focus on crypto to high-net-worth individuals. But it’s a tricky strategy that likely requires some professional guidance. For PPLI to be worth your time, it’s going to take significant investment and, while you will have access to your funds, you should plan on not touching them for the long-term.

Custodial vs. non-custodial wallets

With a non-custodial wallet, you have sole responsibility for your private keys, which grant access to your cryptocurrency and proof that the funds are yours. While this gives you complete control, it also means you could lose access to your crypto if you lose or forget your keys and haven’t put any recovery measures in place. And if someone gets their hands on your keys, they could empty your wallet. 

Custodial wallets give a third party access to your keys as well, but you’ll need to have utmost confidence in the custodian. When you first buy crypto, it will likely be stored in a custodial exchange wallet with the exchange acting as the custodian. Custodial wallets are more convenient for recovery purposes, and the responsibility of securing your keys doesn’t fall solely on you. 

Which wallet is right for you depends on your security preferences; some people end up using a combination of both. No matter what you choose, make sure you understand your wallet’s security policies and take measures to ensure you always have access to your account. The two most popular methods of storing keys are storing them offline (“cold storage”) or storing them online in a crypto wallet (“hot” wallets).

Professional advisors

The need for professional advisors with crypto experience increases as crypto continues to gain mainstream acceptance. Your tax returns and investment strategies may be fairly simple if you only have a few trades to report, but it gets progressively more complicated when you have many transactions, hold many types of cryptoassets, sell NFTs, participate in staking or mining or DeFi, and more. 

The right advisor can help you file your taxes accurately. In addition, they can advise you on the best accounting method for you, reduce your tax liability, and take advantage of deductions or credits. And an advisor with crypto investment experience can help you make the right financial moves to pursue growth and diversify your portfolio. Consider hiring a financial advisor and/or tax professional with cryptocurrency expertise.

Mercer Street can help you navigate the nuances of planning with crypto.

 Schedule a meeting today with our crypto financial advisor.

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