Bitcoin and stocks are very different kinds of investments. Let’s look at the implications of each, so you can decide which to choose if you want to put all of your financial eggs in one basket.
Bitcoin vs Stocks: Tax Implications
Bitcoin emerges as the winner here. Short-term capital gains are usually subject to higher federal income taxes than long-term capital gains. Bitcoin enables you to harvest your tax losses to offset your capital gains tax liability.
You therefore save more money, which you can then reinvest in your portfolio.
Bitcoin vs Stocks: Capital Gains
There’s no winner here, as gains from both bitcoin and stocks are subject to the same capital gain taxes. This is because bitcoin and other cryptocurrencies are treated as ‘property’ by the IRS.
Bitcoin vs Stocks: Capital Losses
Bitcoin emerges as the winner in this category. Why? Precisely because the IRS treats bitcoin as property (see above). While stocks come under the wash sale rule, bitcoin doesn’t. Unlike with stocks, you don’t have to wait 30 days to harvest losses from your bitcoin investments.
There is even crypto tax software that allows you to harvest these losses automatically, any time your crypto portfolio goes into the red. Just be aware that abusive practices will not be tolerated, such as ongoing, repeated harvesting of losses over a long period of time.
Bitcoin vs Stocks: The Risks
The winner here depends on what type of investor you are. Any investment carries risks, but there are more predictors in place for stocks and their future performance than there are for bitcoin.
With stocks, you can investigate the company and the ratio of its stock price and earnings to get a full financial picture. You can also hire professionals to further inform you on how well a stock is likely to perform (taking their advice, as always, backed up by your own research).
With bitcoin and other cryptocurrencies, there is a different kind of risk. Cryptocurrencies are relatively new, are based on supply and demand, and aren’t yet widely adopted. Something like bitcoin could either be replaced by other digital currencies, or it could even be eliminated with new regulations.
Another way to evaluate the risks of both is to look at their respective histories.
The price of bitcoin has fluctuated widely over time, starting with $200-$500 per coin in 2015 to $19,891 in December 2017, dropping again to $3,858 on March 12 of 2020, to rise again to $9,074 on July 5th.
The reason bitcoin has had such spikes is because there’s no way to value it, apart from supply and demand. It spiked when people heard about it and wanted it, a bit like a fashion trend.
Stock growth hasn’t spiked as high, but it has been very much more stable. An example: the S&P 500 index stayed at around $2,000 in 2015. Following a series of more modest rises and drops, as of July 2020 the S&P 500 is sitting at $3,100.
Stocks are also more established, with approximately 10% annual returns.
Conclusion: Which to Choose
If you like the potentials of great gains with a higher risk, bitcoin may be for you. Bitcoin can also be a good way to add diversification to your existing portfolio, as well as a way to hold assets that are not in US dollars.
On the other hand, if you prefer investments whose value can be more easily predicted, and which are more traditionally supported by infrastructures and experts, stocks may be for you.
In our view, stocks should make up the majority of a portfolio, because you can calculate their value based on profits, and it’s a more stable investment over time.