In the ever-evolving world of finance, traditional markets are no longer the only players in the game. From the digital frontiers of cryptocurrency to the tangible history of rare collectibles, "alternative" investment vehicles are capturing the attention of savvy investors looking to diversify. However, with great buzz often comes great complexity.
To help demystify these modern assets, we turned to Doug Moe, founder of Teamwork Financial Group. With a background as a CPA and an attorney, Doug brings a grounded, objective perspective to the conversation. We asked him to apply four consistent questions to each asset class:
- How is this asset class defined in its simplest form, and what is its primary function within our modern financial landscape?
- What are the primary factors that drive the market value of this vehicle, and how does an investor typically track or verify its current worth?
- Are there unique tax implications or regulatory considerations that an owner should be aware of?
- What are the unique risks or barriers to entry associated with this asset, and how easily can an owner convert it back into cash, if needed?
Whether you’re curious about Bitcoin or bullion, we hope this guide provides the essential roadmap for navigating today’s alternative investment marketplace.
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Cryptocurrency
Cryptocurrency—often referred to as “crypto”—is a form of digital money that isn’t controlled by any type of centralized bank or government. Instead, all transactions and ownership records are stored on a public digital ledger called a “blockchain.” Its primary function is to allow people to process payments between themselves without the need for a bank or a service like Venmo or PayPal.
Investors can track the value of their cryptocurrency holdings on an exchange where crypto is traded in real time. As for verification, that is tracked with a personal wallet ID on the blockchain.
Crypto in the U.S. is classified as property, which means it is subject to the same tax implications as other property. Just like any other piece of property, crypto is taxed when it is sold, traded, or used to purchase something. The taxes resulting from this are levied at the capital gains level. There are also many international tax considerations, as well as potential foreign reporting requirements.
With current technology, it is extremely easy to purchase cryptocurrency. There are many platforms and even smartphone apps that let you buy, trade, and sell cryptocurrencies (such as Coinbase, Robinhood, and Venmo). The ability to convert crypto back into cash depends on market demand for that cryptocurrency. Bitcoin, for example, typically has high demand, so it is fairly quick and easy to liquidate, whereas a smaller, less established coin may have lower trading volume and take longer to liquidate back to cash.
Non-Fungible Token (NFT)
A non-fungible token (NFT) is a digital ownership record that, like cryptocurrency, is stored on a blockchain. They are one-of-a-kind digital assets that demonstrate ownership of specific digital media, such as music, collectibles, digital art, and more.
NFTs are traded on specific marketplaces, and the value is based on several factors: the most recent sale price (if any), the current highest bid, and comparable sales. Since each NFT is unique, its value is mainly based on opinion and other hard-to-quantify factors such as brand, community recognition, and rarity. Ownership can be verified on a blockchain in the same way cryptocurrency is verified.
The same tax rules that apply to crypto also apply to most NFTs. Some NFTs may be taxed at a higher rate since they might be classified as collectibles. If you are creating and selling NFTs, these transactions are considered ordinary income. The regulatory environment for NFTs is in flux, as rules in many jurisdictions worldwide are still developing.
With current technology, it is very easy to purchase NFTs, just as it is to purchase cryptocurrency, thanks to plenty of public marketplaces. However, they can be very hard to convert back to cash, as the sale of any NFT depends on the demand for that specific piece of digital media.
Precious Metals
Precious metals are naturally occurring, rare metals that have been used throughout history to make jewelry and technology, and/or function as a means of exchange. Think of things like gold, silver, platinum, and palladium. In today’s economy, the primary functions of these assets are to serve as a luxury and as a hedge against inflation and instability.
The main market factors affecting the value of precious metals are economic and political, with rising inflation and political instability tending to drive certain precious metal prices higher. Investors can track their current value on global commodity markets. Ownership can be verified through either direct possession of the physical asset or ownership in an exchange-traded fund (ETF) that tracks metal prices.
Rather than being considered standard commodities, precious metals are treated as collectibles by the IRS (more on this below). This means they are subject to a higher maximum capital gains tax rate of 28% when they are sold after more than a year (short-term gains are taxed as ordinary income). This applies to both the physical assets and ETFs.
Most precious metals are easy to acquire either by physical purchase or by buying into an ETF, and can typically be readily converted back to cash as needed.
Collectibles
Collectibles are physical items people purchase because they are historically significant, valuable, or desirable. This category includes a wide variety of items, including art, antiques, coins, stamps, and wine. Their primary function is to store value thanks to traits such as rarity, historical importance, and aesthetic value.
Factors impacting a piece’s market value can vary widely depending on the specific kind of collectible it is. In the art world, for example, the death of an artist can drive value. Likewise, the rookie card of an athlete who goes on to have a legendary career can appreciate significantly in value. Value is usually tracked through appraisers, online marketplaces, and auction houses.
Gains on collectibles can be taxed at a maximum rate of 28%. There are also few regulations regarding authenticity, so it is usually up to the buyer to confirm a collectible is legitimate.
This category often sees higher barriers to entry than other asset categories. This can be attributed to many factors, including the high cost of established collectibles, the scarcity of valuable pieces, the higher risk of fraud, and more. Liquidity ultimately depends on the collectible and its current market.