Since the launch of the first-ever cryptocurrency in 2009, investors around the world have a new asset class to invest their money in and make decent returns. However, this launch has also sparked a debate about Bitcoin vs stocks; the traditional investment vehicle. So, is Bitcoin really better than stocks? And, Is crypto taxed the same as stocks?
What Are Stocks?
Stocks, also called equities, are a type of security that gives you ownership of a company when purchased. When an investor buys a stock, they can make money through dividend payments and capital appreciation.
There are two main types of stocks:
- Common stock: Allows the investor to receive dividends and to cast a vote during shareholder meetings.
- Preferred stock: This stock allows the owner to receive dividends before the common stockholders. Also, if a company goes bankrupt and has to liquidate its assets, it prioritizes preferred stockholders over common stockholders. But, they cannot vote in shareholder meetings.
These are the two main types of stocks but these are dividends into asset-class subcategories such as value stocks, growth stocks, and income stocks. Historically speaking, stocks are considered among the best ways to build wealth over time.
How to Invest in Stocks?
A few investors invest directly in companies by purchasing their shares via a full-service broker who typically charges for the purchase or disposal of shares.
Another way of investing in shares is via mutual funds, a pooled collection of bonds, stocks, and other securities. Mutual funds are managed by a fund manager who decides where the money is invested in the pool.
Finally, a few investors also put their money in stocks through exchange-traded funds (ETFs), a type of index fund. Just like stocks, these can be bought and sold at the current market price.
Now, in our venture of understanding is crypto taxed the same as stocks, let’s move on to cryptocurrency.
What Is Cryptocurrency?
A cryptocurrency is a virtual or digital currency that is tracked on digital ledgers and secured by cryptography making it impossible to counterfeit or spend it more than once.
Cryptocurrencies have become wildly popular in the last few years due to the returns they can offer in a short period. Bitcoin and Ethereum are two of the most known cryptocurrencies.
Unlike fiat currency, cryptocurrency does not exist in a physical form unless the owner wants it turned into a physical token. Once you buy a crypto token via an online exchange platform, it is stored in a digital wallet.
Despite being present in the market for more than a decade, cryptocurrencies still fall in the regulatory gray zone and governments do not support them fully. Also, they are extremely volatile and their value can fluctuate dramatically.
How to Invest in Cryptocurrency?
To buy cryptocurrencies, you need to open an account on crypto exchange platforms such as BlockFi, Coinbase, Kraken, or another exchange. There are thousands of cryptocurrencies present in the market and a particular exchange might not support the virtual currency you want to buy. So, it is important to do your research before choosing an exchange.
- After opening an account on an exchange, you have to add fiat money to your account, and then you can begin investing in cryptocurrencies
- Your crypto token will be held in a custodial wallet controlled by the exchange
- Or, you can choose to use a cold wallet, which is a physical device also known as a hardware wallet to store your tokens.
Another option is to use a mobile, desktop, or web-based application known as a hot or software wallet to store your token online. A physical wallet has superior security as compared to an online wallet.
With that out of the way, let’s get deeper into the Bitcoin vs stock debate, and let’s start with the differences.
Difference Between Stocks and Cryptocurrency
Stocks and cryptocurrencies are clearly very different, but to a new investor, it might be confusing, and rightly so. For this reason, we’ve prepared a table to point out the differences. The table below can help clarify how these two investment vehicles differ.
Now, let’s get to the most important question - Is crypto taxed the same as stocks?
Crypto Taxation vs Stocks Taxation
- Capital Gains are the Same
The capital gains of crypto and stock are the same. According to the IRS Notice 2014-21, cryptocurrency is treated as property. When you hold a token as an investment, it will be subjected to the same capital gains tax similar to stocks and securities.
- Capital Losses: Crypto Offers More Frequent Tax Loss Harvesting
When we talk about harvesting losses, crypto has a significant advantage over stocks. The reason is that it is treated as property and hence, it is not subjected to the wash sale rule similar to stocks and securities.
Every investment portfolio fluctuates as per market conditions. When your investments are in the red (down from the actual amount invested), you can sell the investment, harvest tax losses, and buy it back, benefiting from the realized loss. It can reduce your overall tax bill and the savings can be further reinvested to increase the value of your portfolio. Thus, the more often you harvest tax losses, the more savings you can generate to reinvest them in your portfolio.
Since crypto is treated as property, the wash sale rule does not apply to crypto. The wash sale rule doesn’t allow stocks and securities to claim losses on the sold stocks and then the repurchase of “identical” stock within 30 days of the disposal. In the case of crypto, you don’t have to wait for 30 days to harvest losses.
Let’s take an example:
Joe bought $15,000 worth of Google stack (15 shares at $1,000 each). After five days of the purchase, Google’s stock tanks to $600 a share. In this scenario, Joe can sell his stock and buy another 15 shares at $600, but he cannot claim the capital loss of $6,000 ($1,000 - $600 x15) because of the wash sale rule.
If Joe bought Bitcoin of the same value, he could’ve easily claimed the losses coming in the radar of the wash sale rule. Also, Joe can harvest his losses every time his investments are in red. A few crypto tax software can automatically do this for the investor.
Crypto Taxation vs Stocks Taxation: Caveat
The one thing an investor has to keep in mind is that continuous tax-loss harvesting and ignoring the 30-day window is neither permitted nor denied as per the present-day crypto-related guidelines. But, abusing this practice can result in substance over form arguments and further disallowance of losses.
So, is Bitcoin better than stocks? When it comes to tax-loss harvesting, Bitcoin or cryptocurrencies in general, take the cake.
Crypto or Stocks: What Should You Invest In?
Cryptocurrencies and stocks are excellent investment vehicles and hold a special place in the investment realm. The right investment choice depends on your goals, risk tolerance, and several other factors.
Investing in stocks might be the right option for you if you are willing to build wealth slowly. With decades of stock trading history, we can see that stocks are among the best ways to build wealth over the long run. Given that there’s some risk involved, doing a proper fundamental analysis with a sensible approach to investing can yield great results.
Crypto investing is volatile but it can grow your wealth fast if you know what you are doing. Investors have already become millionaires with crypto with proper analysis of the market and coins and crypto will continue to make investors rich in the future.
Still, the volatility factor cannot be ignored, and the future of cryptocurrency is uncertain. The majority of financial advisors advise their clients to stay away from this risky investment and achieve their long-term financial goals.
The Bottom Line
Both cryptocurrency and stocks hold a special place in the investment world. If an investor plans on building wealth slowly over a long period of time then stocks are a better option. If an investor likes to take risks and is not afraid of losing large amounts of money, they can give crypto a chance. It is risky because the crypto market is highly volatile and a single tweet from an influential person can either escalate the prices or tank them.