4 Things You Can Do Now to Prepare Your Crypto Investments for Future Regulation

The growth of the cryptocurrency market has caught the attention of investors, businesses, and now, Uncle Sam. So if you’re among the 16% of Americans involved in the crypto market, you may be wondering: What do upcoming regulations mean for me? 

It’s not yet clear, but we may soon have a better idea. For investors who are wondering what to make of President Biden’s recent executive order on cryptocurrency or any other new regulatory developments, plenty of experts say it’s actually a good thing. More regulation could increase market stability and the price and value of crypto, so investors can look at it with a healthy optimism, says Nicole DeCicco, founder of CryptoConsultz, a digital currency consulting service based in Vancouver, Washington.

“The train’s already left the station,” she says. “Rather than try to stop it, let’s hope that it brings some benefit to the market.”

How Crypto Regulation Could Affect Investors

No one actually knows yet how the average investor will be affected by growing regulations, at least not until the federal government decides on the specific rules. And some market participants may not feel many changes at all once the dust settles, says Marco Santori, the chief legal officer at digital cryptocurrency exchange Kraken.

Biden’s move has encouraged optimism as it signals to the crypto industry that there’s now a “cop on the beat,” and investors who were worried about the Wild West feel to the market may now see it as a safer place to invest, says Santori.

And while some investors are wary of cryptocurrency regulation, Biden’s executive order is not altogether unexpected, and is even being viewed as a positive by some in the industry. “We’ve anticipated this for years,” says Santori. “We are delighted to see it and look forward to the outcome, and the studies that the executive order will produce,” he says.

Keep in mind that with volatile cryptocurrency assets, experts recommend keeping any holdings to less than 5% of your total portfolio, and only invest what you’d be comfortable losing. Before you invest, make sure you have an emergency fund and have paid off any high-interest debt, such as credit cards.

While the exact substance and timing of new crypto regulation is unclear, there are things investors can do right now to prepare and be ready for it.

How You Can Prepare for Crypto Investor Regulations

No matter what regulation might look like in the future, here are four things experts say crypto investors should do now to be ready for it:

1. Stick to your investing strategy

Sticking to your strategy is likely the best course of action, no matter what’s happening in the news or in conference rooms at the White House. Crypto investors should think about their strategy similarly to the stock market — just like you shouldn’t stop contributing to your Roth IRA or 401(k) over a bad day or headline, you shouldn’t drastically change your crypto strategy.

“Change is inevitable, and we are hopeful crypto investments will continue to provide opportunities investors might not otherwise have access to in traditional markets,” says DeCicco. “Keeping the faith during uncertain times, while risky, can position investors to maximize their stake in the game while weeding out investors impacted by fear of the unknown.”

2. Keep records

It’s also critical to keep records of your crypto transactions, as some investors may have corresponding tax liabilities. The IRS currently views virtual currency as property, and trading crypto, as a result, is a taxable event. “It’s the investor’s responsibility to track transactions,” says Joshua White, an assistant professor of finance at Vanderbilt University, and a former financial economist for the Securities and Exchange Commission. White adds that many exchanges may already offer investors year-end tax documents detailing their trading activity.

A crypto portfolio tracker can do the work for you and help ensure accuracy in your record-keeping. This can be particularly helpful for more active traders. A tracker is a third-party tool you can sync with your wallets that will pull your data and show your gains, losses, and other factors about your activity and holdings. Some will monitor price changes, autofill tax forms, or offer negative balance warnings.

3. Report income and gains on your taxes

It’s important to keep records and report any income or capital gains earned through crypto trading. “The IRS wants records of capital gains,” says White. “They’ll also want to know if you have holdings in a foreign account,” he says, so if you have crypto amounting to more than $10,000 held on a foreign exchange or account, you should report that as well. 

You might also want to revisit your previous tax returns if you have any unreported crypto, and consider getting a crypto portfolio tracker to help you stay on top of your transactions. 

4. Diversify and safeguard your holdings

Finally, it’s a good idea to take some steps to safeguard your crypto holdings — both from the whims of the market, and from potential security threats. DeCicco recommends that you diversify your holdings (just like with traditional assets) to lessen the blow that any new rules may have on individual cryptocurrencies or tokens. “Diversifying is important, whether regulations happen or not,” she says. 

DeCicco also recommends you move your crypto holdings to an offline digital wallet. “Keep your funds in cold storage,” she recommends, as it’s a strong way to ensure that cybercriminals can’t somehow access your holdings. 

While these steps can help investors get up to speed with best practices and stay above board with the IRS, the fact is, we won’t know what new rules or regulations will look like for some time. 

Crypto Regulation: What You Need to Know

While it’s unknown what rules or regulations may develop, it should help clear the current logjam of agencies trying to keep track of the crypto markets. “There’s been a lot of regulatory uncertainty because you have a lot of agencies playing roles,” says White.

For example, the Commodity Futures Trading Commission (CFTC) oversees the trading of crypto futures, while the Financial Crimes Enforcement Network (FinCEN), a part of the Department of the Treasury, tries to tackle cyber crimes and money laundering. Further, the Securities and Exchange Commission (SEC) has been wading into the crypto markets, too, with SEC chairman Gary Gensler talking about the need for crypto regulation during the past year.

In effect, federal agencies are all over the place in trying to grapple with cryptocurrencies. “I think regulations could provide some stability, depending on how strict they are,” White says. 

But don’t expect your cryptocurrency to be under new regulation too soon. “Most federal regulations, when I worked at the SEC, if there’s rule-making activity — it’s not going to happen immediately,” says White. “They’ll think about what areas need regulation, they’ll propose rules, get public input, and meet with members of the industry,” before deciding on any concrete regulations, he says.

You should, however, take Biden’s executive order seriously, as it is a sign that the federal government is preparing to get involved in the crypto space, Santori says. “It’s more than just a signal flare,” he says. “This is meant to send a message to the entire ecosystem of stakeholders: The government is on it [regulation], and we’ve got it covered.”