7 crypto developments for advisors working with digital assets

January 5, 2023 10:25 AM

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One in five Americans has bought, sold or used crypto as a form of payment, but many investors and their advisors aren't fully aware of the tax consequences of trading or exchanging digital assets. Meanwhile, a crypto reporting requirement in the 2021 infrastructure law may result in unexpected fines or worse for crypto investors.

For more on these stories and other crypto news, read our roundup below.

Keeping pace with the evolving crypto tax environment

Investors around the world are growing increasingly interested in the potential of cryptocurrency as a financial asset, if the numbers are anything to go by.

But while at least 200 million people around the world have invested in one of the more than 18,000 cryptocurrencies on the market, how crypto is taxed is still a mystery to many clients and advisors, according to Chuck Sockett, partner, UHY LLP, and managing director, UHY Advisors.

Socket described for Financial Planning key aspects of how crypto assets are taxed today and why it's crucial for advisors to watch closely for any changes in the crypto tax landscape.

Read more:

Crypto taxation: What advisors need to know now

Virtual currencies becomes digital assets on Form 1040

You know that crypto has entered the mainstream when it merits its own question on your tax return.

Now, in a draft version of Form 1040 for the 2022 tax year, the IRS has changed the crypto language used on the form, broadening its reference from "virtual currency" to "digital asset."

This change is a clear reflection of the rapidly growing interest and investment in other types of digital assets beyond cryptocurrencies, such as non-fungible tokens.

Read more:

IRS expands crypto question on draft version of 1040

Absent of regulation, compliance officers should take crypto lead

The contrast between the speed of innovation in digital assets and the glacial pace of rulemaking to regulate them could not be greater.

With regulators continuing to be slow to act, Amy Kadomatsu, CEO of ComplySci, believes the onus is on compliance officers to take the lead in providing crypto trading advice to employees and creating a compliance culture within their firms.

"Regulators have already started internal processes and have included digital asset and cryptocurrency matters within 2022 exam requirements, so forward-thinking financial services institutions should develop actionable compliance protocols to address oversight of these evolving assets," said Kadomatsu.

Read more:

Compliance officers should leapfrog regulators in providing crypto trading guidance to employees

Crypto fraud — nothing new under the sun

A major indictment in a Florida federal court is opening investors' eyes to the potential dangers of old-school fraud in the shiny new world of crypto.

"Unscrupulous fraudsters are nothing new to the investment world," said George L. Piro, Special Agent in Charge of FBI Miami. "What's changing is they are now pushing their criminal activity into the cryptocurrency realm."

In a classic case of investors being lured into "profit-making opportunities that appear too good to be true," Joshua Nichols of Stuart, Florida was charged with conspiracy to commit wire fraud and conspiracy to commit securities fraud in an attempt to fleece unsuspecting crypto investors.

Read more:

$100M crypto fraud blends new tech with oldest trick in the book

Receiver beware — crypto reporting requirement puts investors on notice

Unsuspecting crypto investors may run afoul of a provision in the 2021 infrastructure law that requires taxpayers who receive more than $10,000 in digital assets to report the sender's name, address and SSN to the IRS.

With reporting required within 15 days and penalties including fines, felony charges and even prison, the law should concern "anyone involved with the transfer of digital assets," said Ric Edelman, founder of the Digital Assets Council of Financial Professionals.

The reporting requirement comes as bitcoin and other digital currencies are gaining more traction, with one in five Americans investing in, trading or using cryptocurrency as a form of payment.

Read more:

The little-noticed crypto law that can turn ordinary investors into felons

If crypto’s good for Fidelity, then advisors need to sign up, too

Retirement assets form the largest part of the average American's overall net worth, so when Fidelity became the first large retirement plan provider to add bitcoin to its investment menu for plan administration, it's past time for advisors to get on board with crypto.

That's the fervent belief of Caitlin Cook, head of community and vice president of operations of Onramp Academy, which provides market research, resources and tools to help advisors navigate the evolving crypto world.

The Fidelity move "should reinvigorate advisor education efforts around cryptoassets and spark a new sense of urgency among advisors to become more crypto-fluent in order to effectively advise clients on this emerging space," said Cook.

Read more:

Why Fidelity's bitcoin bombshell should light a fire under crypto-averse advisors

Plugging the gap in advisor crypto education

Advisors who want to get up to speed on crypto to be better prepared to answer the increasing number of client requests for information about digital assets can now take a 12-video course on crypto that comes with 1½ CE credits.

The course is the result of a partnership between Flourish Crypto and the Digital Assets Council of Financial Professionals, run by Ric Edelman, and is designed for the gap in advisor crypto knowledge and education that desperately needs to be filled.

"A staggering 94% of advisors have gotten questions from clients about crypto, and many feel ill-prepared to have these conversations," said Ben Cruikshank, head of Flourish.

Read more:

Crypto education for advisors gets boost in new Flourish, Ric Edelman deal