Jan
08
2023
A Guide to Gift Letters for Mortgages

A Guide to Gift Letters for Mortgages

By | Home Ownership, mortgage | Comments Off on A Guide to Gift Letters for Mortgages

If you’re fortunate enough to have a family member or close friend who is giving you funds to put towards a down payment, congratulations. But in this scenario, a gift letter can be an important part of validating money given to you for the down payment or closing costs on a home.

Approximately 22% of first-time homebuyers received gift funds to help with the purchase of a home, according to a 2022 National Association of Realtors® (NAR) survey.

Properly documented gift funds will help the mortgage loan to pass underwriting so your loan may be approved. In this guide, you’ll learn the story on gift letters, how they differ for various types of mortgages, plus other important details.

What Is a Gift Letter?

A mortgage gift letter is a legal document whose primary purpose is to state that down payment funds given to the borrower are not expected to be repaid. The lender wants to ensure that the borrower is not taking on more debt to help finance the mortgage, even if it is money from family or friends. The letter is required to pass underwriting.
It’s essential that a gift letter include all the necessary elements to be considered in your loan application.


💡 Quick Tip: You deserve a more zen mortgage loan. When you buy a home, SoFi offers a guarantee that your loan will close on time. Backed by a $5,000 credit.‡

First-time homebuyers can
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with as little as 3% down.

What Should Be Included in Gift Letters?

Lenders usually provide a standard gift letter for you and the donor to complete, but it’s helpful to know what needs to be stated. Gift letters should include the following details:

•   Dollar amount of the gift

•   Name of the donor, address, phone number, and details of the account from which the money will be or was drawn

•   Relationship to the borrower

•   Name of the borrower, address, and phone number

•   Address of the home associated with the down payment

•   The donor’s signed statement saying the funds will not need to be repaid by the borrower

•   Language saying the funds were not made available to the donor by any party interested in the sale of the property

•   The dated signatures of borrower and donor.

Note: Along with a gift letter, the lender may want to see proof of funds in the donor’s account and evidence the money was deposited into the borrower’s account.

Does Timing and Amount of a Gift Matter?

When it comes to gift letters, when and how much you received may need to be documented.

Amount

There typically is no limit on the amount of gift money, but when a deposit is more than half of your monthly household income, lenders usually will want an explanation.

For USDA loans and FHA loans, you’ll need to explain any amount over 1% of the purchase price or appraised value of your home that was deposited in your account recently. There are exceptions, including tax refunds and bonuses, that do not need to be “seasoned” or explained.

Timing

A lender will look at bank statements for the past 60 to 90 days. Amounts that existed in your account before this time are considered seasoned, and you may not need to provide a gift letter for that money. The amount of a deposit inside that time frame may need a letter of explanation.

If you have money in other places, you’ll want to deposit it into your bank account for proper seasoning.

Who Can Give Down Payment Gifts?

Down payment gift regulations vary by loan type, but generally, gift funds are allowable on many mortgage types from close family members or friends. There are some key differences between regulation for down payment gifts for conventional and government home loans (USDA, VA, and FHA mortgages).

FHA Loans

Under Federal Housing Administration guidelines, gift funds for the down payment are allowable from the following donors:

•   Relatives of the borrower

•   The borrower’s employer or labor union

•   A close friend with a clearly defined and documented interest in the borrower

•   A charitable organization

•   A government agency or public entity that provides homeownership assistance to low- and moderate-income families or first-time homebuyers.

The gift must not come from an entity that has an interest in the sale of the property, such as the seller, the builder, the real estate agent, or the broker.

Buying a fixer-upper? This guide to FHA 203(k) loans and options could be a good read.

Conventional Loans

Under conventional loan guidelines (meaning non-government), gift funds are allowable from these sources:

•   A relative, which Fannie Mae defines as someone related by blood, marriage, adoption, or legal guardianship

•   A domestic partner or fiance.

The donor may not be anyone with an interest in the transaction, such as the builder, developer, or real estate agent.

USDA or VA Loans

With loans backed by the Department of Agriculture or Veterans Affairs, the only people who cannot provide gift funds are those who would benefit from the sale, such as the seller, lender, real estate agent, or developer. The gift funds must be properly sourced, which means the lender wants to see a paper trail from the bank account of the donor to that of the borrower.


💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as low as 3.5%.1

Are There Limits on Gifts?

No, but some loans may require borrowers to come up with a portion of the down payment. This is what’s known as a minimum borrower contribution, and it applies to conventional loan financing. It is different based on what type of real estate is being purchased, be it a primary residence, second home, or investment property.

Primary Residences

For primary residences, there is no minimum borrower contribution. All of the money needed to complete the transaction can be a gift. This is true whether the loan-to-value ratio is above or below 80% for conventional financing.

Second Homes

For second homes, if the loan-to-value is above 80% (meaning the down payment was less than 20%), borrowers must make a minimum contribution of 5% from their own funds. This is also true on principal units with two to four units.

Investment Properties

Gift funds are not allowed on conventional mortgages for investment properties. Fannie Mae also states that gift funds are not to be used for investment properties.

Recommended: How to Buy a House From a Family Member

How Does This Affect Taxes?

Taxes may affect the donor of the funds, unless the home purchaser makes special arrangements to pay taxes on the gift funds.

The money gifted may be excluded from tax as per the annual exclusion amount. The IRS says the annual exclusion for gifts is $17,000 for 2023. This is per person, so if buying real estate with a partner, the amount doubles to $34,000.

If the gift is from a set of parents, each parent can gift that amount to each of the borrowing partners. This allows for $68,000 to be gifted before triggering the gift tax. In other words:

•   Parent 1: $17,000 for borrowing partner 1, $17,000 for borrowing partner 2 = $34,000

•   Parent 2: $17,000 for borrowing partner 1, $17,000 for borrowing partner 2 = $34,000

Adding the amount for both parents contributing for both borrowers equals $68,000.

If that amount is exceeded, each donor can also claim it as part of the lifetime exclusion on estate taxes, which has a limit of $13.61 million for 2024.

Gift Equity Letters vs Gift Letters for Mortgages

A gift of equity is when the seller gives a portion of the home’s equity to the buyer. It is transferred to the buyer as a credit in the transaction and may be used to fund all or part of the down payment on principal or second homes.

If there is a gift of equity, a gift of equity letter is required. A signed gift letter and settlement statement with the equity gift will be retained in the loan file.

While there are similarities, there are also some differences.

Gift of Equity

 Gifts for Mortgages
Must be applied as a reduction in purchase price or credit Gifts can be an unlimited amount but are not accepted for investment properties
Borrower may not receive cash back at closing for gift equity Borrower can receive funds back at closing
Required to notify appraiser of equity gift Appraiser doesn’t need to know about it
Is from the seller, who can be a relative. For FHA loans, only equity gifts from family are acceptable Is from a donor related to the borrower
Can be used to fund the down payment and closing costs Can be used to fund the down payment and closing costs
Permitted for principal and second homes Permitted for principal and second homes

Whether you’re fortunate enough to receive a gift or you’re making your own way toward homeownership, this mortgage calculator may come in handy.

Recommended: Mortgage Loan Help Center

The Takeaway

A gift letter ensures that the money, or equity, you receive when buying a home is validated when your mortgage loan goes through underwriting. It’s a necessary step on your way to loan approval that a good mortgage lender may be able to help you with.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Jan
08
2023
What Are Futures? A Guide to Futures Trading

Exploring Futures in Financial Markets: A Comprehensive Guide

By | Growing Wealth, invest, Investing | Comments Off on Exploring Futures in Financial Markets: A Comprehensive Guide

Some investors may trade futures contracts in order to hedge against risk, or to speculate on the price movements of a given asset or security — or because their business will benefit if they lock in a commodity at a certain price. Trading futures can provide opportunities for a range of investors.

A futures contract requires both parties to honor the terms, no matter what the price is in the market when the contract expires. If you want to trade futures, there are various ways they can fit into your portfolio or plan.

What are Futures?

Futures are derivatives that take the form of a contract in which two traders agree to buy or sell an asset for a specified price at a future date. Popular underlying assets for futures may include physical commodities like gold, corn, or oil, as well as currencies, or financial instruments like stocks.

The most commonly traded futures contracts use standardized terms, and are traded on a futures exchange. For example, if you want to buy or sell corn futures, one contract would equal 5,000 bushels and be traded via the Chicago Board of Trade (CBOT). Oil is traded on the Chicago Mercantile Exchange (CME), and one oil futures contract equals 1,000 barrels of oil.

Traders buy and sell in increments specified by the contract. To buy 50,000 bushels of corn or 10,000 barrels of oil, you’d buy 10 contracts of each. Given the quantities and dollar amounts of these trades, investors often use leverage, thereby paying only a fraction of the total cost of the position.


💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Understanding How Futures Work

Futures work by obligating a buyer or seller to purchase or offload an asset — it’s a contract.

Mechanism of Futures Trading

A futures contract obliges the buyer to buy a certain asset, or the seller to sell an asset, at an agreed-upon price, by a certain date. Each party must fulfill the terms of the contract, no matter what the market price or spot price is when the contract expires (or trade the contract before the expiration).

Futures contracts are standardized, as noted above, and each contract also spells out the contract terms, which includes among other things:

•   The unit of the trade (e.g., tons, gallons, bushels, etc.).

•   The grade or quality of the commodity, where relevant. For example, there are different types of corn, oil, soy, etc.

•   Terms of settlement (e.g., physical delivery or a cash settlement).

•   Quantity of goods covered by the contract.

•   Currency in which the contract is priced.

Recommended: How Does a Margin Account Work?

The Role of Futures in Markets

A futures contract allows investors to speculate on the direction of the underlying asset, either long or short, using leverage. (Leverage means the trader doesn’t have to put up the full amount of the contract. Instead, futures traders use a margin account.) As such, they’re a tool that allows investors to use leverage and speculation.

Types of Futures Contracts

There are numerous types of futures contracts, including those tied to underlying assets such as equities and commodities. They can even be tied to other futures.

Equity, Commodity, and Other Futures

Futures contracts allow investors to make bets on the prices of a wide array of assets:

•   Commodity futures, which allow investors to buy or sell physical goods like crude oil, pork bellies, natural gas, orange juice, corn, wheat, and more.

•   Financial futures, including index contracts and interest rate or debt contracts.

•   Precious metal futures allow investors to bet on the future prices of gold, platinum, and silver.

•   Currency futures for fiat currencies like the euro, yen, the British pound, and more.

•   U.S. Treasury futures allow investors to make bets on the future value of government bonds.

What are stock futures? Like futures contracts where the underlying is a physical commodity, some futures are tied to shares of a single stock or ETF. Stock index futures, however, are tied to the price movements of an index like the S&P 500 index.

Trading and Speculating with Futures

There are two key aspects to futures trading, which are hedging and speculating. Both play an important role in the markets, and determining whether futures are actually traded or not. There are also trading strategies to keep in mind, too.

Strategies for Futures Trading

There are many strategies for trading futures contracts, just as there are many strategies for trading almost any other type of security or derivative. To name a few of the basic strategies, investors can look at strategizing around price pullbacks, breakout trading, or even spread trading — each requires its own gameplan, and some background research to get started.

Futures as Speculation and Hedging Tools

Hedging is a big reason why investors buy futures contracts: It’s a way to protect against losses resulting from price changes in commodities.

Among the businesses that hedge using futures, the goal is to reduce the risk they face from unexpected price movements, and to guarantee the price they pay or receive for a particular asset.

If a large food manufacturer wants to lock in the price of corn, for example, they might enter into a contract for $10 a bushel. Since corn contracts are typically standardized at 5,000 bushels per contract, the total amount of the futures contract would be $50,000 ($10 x 5,000), to be delivered in six months. Entering into this futures contract would offer the buyer some protection against the possibility of rising corn prices in the future.

Let’s say the price of corn does rise to $12/bushel by the time the contract expires. In that case, the buyer still only pays the agreed-upon price of $10/bushel, even though the spot price is now $12/bushel.

For the corn producer in this scenario, even though it turned out that the futures contract terms weren’t quite as favorable as the actual market price — the contract guaranteed they would get at least $10/bushel, which provided a hedge against a potentially bigger loss.

Although it’s possible to settle a futures contract for the physical asset specified in the contract, most futures contracts are cash-settled. That’s because speculation on price movements is one of the main reasons that investors purchase futures contracts. A futures contract gives traders the opportunity to speculate whether a commodity will go up or down and potentially profit from the price change.

If the underlying asset of the futures contract — such as gold, oil, or corn — is above the price specified in the futures contract, then the investor can sell that contract for a profit before it expires. In that case, the contract would sell for the difference between the market price of the underlying commodity and the purchase price as specified in the contract.

In such a transaction, the underlying commodities don’t change hands between the counterparties of the contract. Instead, the trade would be cash-settled in the brokerage account of the investor.

Alternatively, an investor using futures for speculation could lose money if the price of the commodity is lower than the purchase price specified in the futures contract.

Risks and Benefits of Trading Futures

Futures trading has some significant risks and potential rewards — investors would be wise to know what they’re getting into, accordingly.

Understanding the Risks

Owing to the nature of futures trading, i.e., the binding nature of the contracts and the use of leverage, there are some obvious risks to bear in mind.

In a speculative trade, a futures contract allows you to bet on a commodity’s price movement. If you bought a futures contract, and at expiration the price of the commodity was trading above the original contract price, you’d see a profit. However, you could also lose if the commodity’s price was lower than the purchase price specified in the futures contract.

The potential risks here can be greater than they seem, because trading on margin permits a much larger position than the actual amount held by the brokerage. As a result, margin investing can amplify gains, but it can also magnify losses.

Imagine a trader who has $5,000 in their brokerage account and is in a trade for a $50,000 position in crude oil. If the price of oil moves against the trade, the losses could far exceed the account’s $5,000 initial margin amount. In this case, the broker would make a margin call requiring additional funds to be deposited to cover the market losses.

Speculators can also take a short position if they believe the price of the underlying asset will decline. An investor would realize a gain if the underlying asset’s price was below the contract price, and a loss if the current price was above the contract price. Again, using leverage to place these bets, long or short, can potentially expose investors to more risk than they intended.

Potential Benefits and Rewards

Some of the potential benefits of trading futures include the fact that investors can use leverage to try and generate outsized returns, the markets are liquid (meaning there’s plenty of trading action) and it offers up a chance to make some relatively quick (and potentially large) returns. That should, of course, be weighed against the aforementioned risks.

Futures vs Other Derivative Instruments

There are other financial derivatives with similar characteristics to futures contracts, such as options and forwards.

Comparing Futures with Options and Forwards

American-style options grant the buyer the right, but not the obligation, to buy or sell the contract’s underlying asset at any time until the contract expires.

Unlike a futures contract, however, option contracts don’t require the investor to purchase or sell the underlying asset. The investor can simply let the option expire. A futures contract, on the other hand, obligates the buyer to purchase the underlying asset, or to pay the seller of the futures contract the cash equivalent of that asset at the time of the contract’s expiration.

Similarly, a forward contract looks and functions a lot like a futures contract, with the primary difference being that forward contracts are only settled once — on their expiration date. Forwards are also often settled in the underlying asset (as opposed to cash), and the forwards market tends to be less liquid.


💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

Opening and Managing Futures Positions

Opening and managing futures positions can be relatively simple, granted you’re using a platform that allows for futures trading, and can follow a few steps.

Steps to Start Trading Futures

It’s common for some brokerages to have their own futures-trading capabilities, as well as their own rules about what an investor needs in terms of assets in order to trade futures contracts. Be sure to verify what those requirements are before selecting a broker.

Once you’re eligible to open a margin account and trade futures, those contracts trade on different exchanges, such as the Chicago Mercantile Exchange (CME), ICE Futures U.S. (Intercontinental Exchange), and the CBOE Futures Exchange (CFE).

From there, depending on the brokerage or platform being used, investors should be able to open and swap futures positions.

Managing Futures Contracts Effectively

Most investors in futures contracts have no interest in either receiving or having to deliver the physical commodities that underlie these contracts. Rather, they’re interested in the cash profit. The means of doing so is to trade the futures contract before its expiration date.

The standardized nature of most futures makes it so that a great many (but not all) futures contracts will expire on the third Friday of each month. Some commodities are seasonal, and only trade during specific months. High-grade corn trades on the CBOT in March, May, July, September, and December, for example.

As with any type of trading or investing, making sure you know what you’re dealing with when it comes to futures — and paying attention to the market — is going to be paramount to finding success as a trader. There are risks at play, and there’s no guarantee that the chips will fall your way. But for some, futures trading has proven fruitful.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Jan
07
2023

Guide to Bitcoin Halving

By | Growing Wealth, invest, Investing | Comments Off on Guide to Bitcoin Halving

“Bitcoin halving” refers to an event that happens every four years when the block rewards for Bitcoin miners get cut in half. This reduces the supply of new bitcoins by 50%.

The crypto halving process was built into the Bitcoin protocol to ensure that Bitcoin would be a good store of value by remaining a deflationary currency. Read on to learn more about halving, why it matters, and the effect it has on Bitcoin’s value.

What Is Bitcoin Halving?

Bitcoin halving — also referred to as “the halvening,” in some instances — is a periodic event where the number of new Bitcoins that enter circulation as a result of crypto mining is reduced by half.

Bitcoin halving occurs once every four years, and as time goes on, the potential rewards for mining become less and less — while, in theory, helping to maintain Bitcoin as a store of value.

For example, when Bitcoin was first introduced, miners could mine as many as 50 Bitcoins every ten minutes. But since then, after several halvings, rewards have been reduced to 6.25 Bitcoins. Other types of cryptocurrencies may use other methods for maintaining value, including coin burning.

How Does Bitcoin Halving Work?

Halving Bitcoins is, as mentioned, built into the Bitcoin blockchain network’s protocol. It is, in a sense, a feature of the system, or a critical component to how Bitcoin works.

By decreasing mining rewards every four years or so, the network made it more enticing for early adopters to start mining early. That is, since the rewards were relatively high early after Bitcoin hit the market, more miners were likely interested in getting involved. But as the rewards are reduced with time, more miners compete for those rewards.

This adds more hashing power to the network, and also ensures that the market isn’t flooded with Bitcoin all at once.

Bitcoin Mining 101

To better understand halving, it may help to have a basic understanding of crypto mining — the process by which new Bitcoins are created. The Bitcoin network functions in a way that requires no centralized planning or authority. People can send value to each other peer-to-peer, for a small cost.

On the network, “mining” facilitates transactions. Bitcoin “miners” are computers that process transactions for the network. They verify that transactions are valid and keep the network secure. In exchange, miners receive new Bitcoins as they are created as rewards.

Bitcoin transactions form groups known as “blocks.” Each block gets attached to all the previous blocks, forming what’s known as a blockchain. A new block gets created once every ten minutes or so, and miners compete to “find” the next block and earn its rewards, with the miners who put in the most work rewarded with new coins.

Miners can also team up and participate in mining pools, which effectively means that miners are pooling their resources to earn reward.

The most recent halving occurred in 2020, which set the reward for finding the next block as 6.25 Bitcoins. This won’t change until the next halving, which will happen sometime in 2024. This is critical to know, especially if you’re actively investing in Bitcoin, as it could have market repercussions.

Recommended: How Many Bitcoins Are Left?

When Does Bitcoin Halving Occur?

Bitcoin halving happens approximately once every four years. The first halving occurred in 2012, when the block reward was reduced to 25 BTC per block from the original 50 BTC per block. Subsequent halvings dropped the reward from 25 BTC to 12.5 BTC, and then to 6.25 BTC. The next halving will set the reward at 3.125 BTC.

By constantly reducing the supply of new currency, the theory is that Bitcoin will remain a deflationary currency, rather than an inflationary one.

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Why Does Bitcoin Halving Happen?

Again, the logic behind halving is that it allows the system to have a set schedule for introducing new BTC into the market, and a set limit for new coins (as well as the total 21 million overall Bitcoin limit). By sticking to a set schedule, Bitcoin can avoid an overabundance problem, and retain value.

Given that there’s no regulatory body that can change that schedule, politics or economic pressure have no effect on the overall amount of BTC in circulation — something that differs when discussing fiat currencies.

Who Chose the Bitcoin Distribution Schedule?

In order to retain its value, a new currency must have a limited supply and be difficult to create. Bitcoin’s creator, Satoshi Nakamoto – whose identity remains a mystery — made the decision to halve Bitcoin’s block reward every four years, according to the project’s original whitepaper.

Halvings have occurred in the following years, with the block rewards being reduced as follows:

•   2012: 25 Bitcoins

•   2016: 12.5 Bitcoins

•   2020: 6.25 Bitcoins

When is Bitcoin halving next? As mentioned, the next halving will occur in 2024, when the block reward will be reduced to 3.125 Bitcoins.

Is Bitcoin Halving a Good or Bad Thing?

Bitcoin halving has its upsides. It has been said that halving is one of the reasons Bitcoin still has value.

When Bitcoin was created, it was the advent of a form of currency that has been created that is profoundly deflationary, and has a fixed supply limit (only 21 million bitcoins will ever exist).

Some say that Bitcoin is the “hardest” money ever known, meaning that Bitcoin is hard to create and has a limited supply. In this sense, Bitcoin is sometimes compared to gold or other precious metals.

Gold also has to be mined and has a scarce supply. This is why Bitcoin is sometimes referred to as “digital gold,” but Bitcoin is not correlated with the price or supply of gold, nor is it considered a precious metal. There is, however, a crypto on the market called “Bitcoin Gold,” which, again, is not the same as actual, out-of-the-ground gold.

Recommended: Bitcoin vs. Gold

Does Halving Bitcoin Have Any Effect on Its Price?

Historically, the price of Bitcoin has increased in the 18 months following a halving. After the first halving occurred in 2012, Bitcoin hit a record high (for the time) of more than $1,000 in November 2013. In April of that year, before the halving, Bitcoin was trading at less than $50.

The second halving occurred in 2016. In December 2017, Bitcoin prices hit a record high of nearly $20,000, up from less than $1,000 in January of that year. And since the halving in 2020, Bitcoin prices increased to more than $60,000 — though they have fallen significantly since then.

After the price increase there is often a retreat, sometimes resulting in drawdowns as large as 90%. The price then begins appreciating slowly leading up to the next halving, and the cycle tends to repeat. This is an oversimplified version of events but it offers a general sense of how halving Bitcoin has impacted prices historically.

That said, past performance does not always indicate future results. Plus, markets move for a variety of reasons, from geopolitical issues and macroeconomic events. Cryptocurrencies can, at times, be correlated with broader financial markets, so it’s hard to pinpoint whether halving was the exact cause of any price increase.

Recommended: Next Bitcoin Bull Run

The Takeaway

Bitcoin halving refers to an event when the amount of Bitcoins miners receive in exchange for processing transactions is cut in half, occurring once every four years. The most recent halving was in 2020, and the next one will happen in 2024.

Halving is a fundamental part of Bitcoin’s network, and as a feature of that network, is what makes some people believe that Bitcoin is unique as a store of value. But the halving can and does have an effect on its price, too, which is something investors should keep in mind.

FAQ

Does Bitcoin halving increase the price?

Historically, Bitcoin prices have risen after a halving event. But there are numerous other factors that affect Bitcoin’s price, and it’s difficult to say that the halving itself has caused values to increase.

How often is Bitcoin halved?

Bitcoin halving occurs roughly once every four years. The most recent halving event was in 2020, and the next one will be in 2024. They will continue to happen on that schedule until the supply of Bitcoin is exhausted.

Is Bitcoin halved?

Yes, Bitcoin is halved, at a schedule of roughly once every four years. The halving process is built into the Bitcoin network’s protocol, as designed by its creator(s).

Photo credit: iStock/happyphoton

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
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Crypto Tax Guide 2023: How to Report Crypto on Your Taxes

By | Growing Wealth, invest, Investing | Comments Off on Crypto Tax Guide 2023: How to Report Crypto on Your Taxes

Make no mistake: You need to report your crypto activity on your tax return. Cryptocurrency has become very popular in recent years, and that hasn’t gone unnoticed by the IRS. If you were active in the crypto markets over the past year, you’ll need to report it on your tax return, or risk being penalized.

Because of this, it’s important that investors know the basics regarding filing and paying taxes on their cryptocurrency investments, which includes reporting their trading activity and income.

How Cryptocurrency Taxes Work

One of the most important things investors need to know before investing in cryptocurrency is how crypto taxes work. Additionally, investors should be aware that classification of cryptocurrencies varies depending on the federal government agency overseeing the investment activity.

The IRS defines cryptocurrencies as digital assets, and that includes non-fungible tokens (NFTs), and stablecoins, too. Despite the fact that crypto is often thought of as a currency, they are not considered currency for federal tax purposes.

Instead, transactions of cryptocurrencies are treated as property, like stocks, bonds, and other capital assets. So, when someone uses, sells, or is paid in a cryptocurrency, they are generally required to pay taxes on their realized gains.

Note, though, that even as the IRS treats cryptocurrencies as property for tax purposes, this categorization is not consistent across all federal government agencies.

The Commodity Futures Trading Commission (CFTC), for example, classifies cryptocurrencies as a commodity when regulating a variety of crypto-related trading markets. The CFTC oversees cryptocurrencies when they are “used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.”

In contrast, the U.S. Securities and Exchange Commission (SEC) attempts to regulate different cryptocurrencies as securities and investors can be subject to securities laws.

In all, there’s something of a turf war happening in Washington D.C. over crypto regulation. But for taxpayers, the most important thing to know is that crypto is considered “property” by the IRS, and investors will need to report it as such on their tax returns.

Do You Have to Pay Taxes on Crypto?

Investors are required to pay capital gain taxes on cryptocurrency when selling, trading, or disposing of their holdings. Additionally, cryptocurrencies can be taxed as income if an individual receives the crypto as a gift, from mining, or for services rendered. There are different types of income, and crypto income is among them.

So, there are two types of taxes potentially at play.

However, not all crypto transactions result in a tax liability. These nontaxable events include buying crypto with cash and holding it, donating it to a qualified charity or non-profit, or transferring crypto to yourself between wallets or accounts. In effect, investors need to realize a gain or loss.

Situations When You’ll Need to Pay Taxes on Crypto

•   Cryptocurrency is sold for cash: When an investor sells cryptocurrency for government-backed currency (fiat currency) and makes a profit, the investor will have to pay capital gains taxes on the proceeds, just as they would on the sale of a share of stock.

•   Cryptocurrency is used to purchase a good or service: If an individual uses their cryptocurrency to buy a new car or pay for a haircut, they will likely owe capital gains taxes on the purchase. To the IRS, using crypto to buy something is the same as selling it for cash, because the crypto needs to be sold for dollars before it can be used to exchange for a good or service. This creates a “realized” gain.

•   Exchanging cryptocurrencies: Converting or exchanging one crypto for another is comparable to selling the one to purchase the other. As a result, the investor may have to pay capital gains tax on the sale of the first crypto, if it was sold for a profit.

•   Being paid in cryptocurrency: If an individual decides to be paid in cryptocurrency, they will need to pay income taxes on that income (just as if they were being paid in dollars) which will depend on their individual tax bracket.

•   Mining cryptocurrency: The proceeds from mining Bitcoin and other cryptocurrencies are typically taxed as income. It’s also possible for the proceeds of some miners to be taxed as business income.

•   Crypto is acquired via an “airdrop” or “hard fork”: In the event of a crypto airdrop or hard fork that results in new coins, those new coins are taxed as income.

Is Crypto Investing Taxed as Income?

Crypto investing is taxed more or less the same way that investing in stocks, ETFs, or other securities is taxed. That is, tax liabilities are generated when an investor disposes of their holdings by selling or exchanging them. Only then do they have both a purchase price (cost basis) and a disposal price, which can be positive or negative ( a gain or a loss).

From there, capital gains taxes can be calculated, similar to how things work with traditional investment tax rules.

Crypto is taxed as income under a few select circumstances, as discussed. So, no, crypto investing itself isn’t taxed as income, but that doesn’t mean that crypto itself is never taxed as income.

How Much Do I Owe in Crypto Taxes?

The amount of crypto taxes owed varies depending on an investor’s income, tax filing status, and the length of time that an investor owned a crypto asset before selling it. Additionally, the type of crypto transaction affects what tax rate an individual will be charged. As mentioned above, some situations result in a capital gains tax liability, and others an income tax liability.

Long-Term Capital Gains Crypto Tax Rates for 2023

If an investor owned a cryptocurrency for more than 365 days before selling or using it, the proceeds of the transaction are taxed at the long-term capital gains tax rate. Here are the cryptocurrency capital gains rates on long-term gains for the 2022 tax year (taxes filed in 2023):

Long-Term Capital Gains Tax Rates for 2022
Tax Rate Single Married Filing Jointly Married Filing Separately Head of Household
0% $0-$41,675 $0-$83,350 $0-$41,675 $0-$55,800
15% $41,675-$459,750 $83,350-$517,200 $41,675-$258,600 $54,101-$488,500
20% >$459,750 >$517,200 >$258,600 >$488,500

Source: Internal Revenue Service

Short-Term Capital Gains Crypto Tax Rates for 2023

If an investor owned a cryptocurrency for less than a year before selling it or using it, the gains are taxed as ordinary income. Additionally, if an individual was paid in crypto, mined crypto, or received crypto via an airdrop, they are taxed as ordinary income. Here are the income tax brackets for the 2022 tax year (taxes filed in 2023):

Short-Term Capital Gains and Income Tax Rates for 2022
Tax Rate Single Married Filing Jointly Married Filing Separately Head of Household
10% $0-$10,275 $0-$20,550 $0-$10,275 $0-$14,650
12% $10,275-$41,775 $20,550-$83,550 $10,275-$41,775 $14,650-$55,900
22% $41,775-$89,075 $83,550-$178,150 $41,775-$89,075 $55,900-$89,050
24% $89,075-$170,050 $178,150-$340,100 $89,075-$170,050 $89,050-$170,050
32% $170,050-$215,950 $340,100-$431,900 $170,050-$215,950 $170,050-$215,950
35% $215,950-$539,900 $431,900-$647,850 $215,950-$539,900 $215,950-$539,900
37% >$539,900 >$647,850 >$539,900 >$539,900

Source: Internal Revenue Service

How to File Taxes on Cryptocurrencies

The most important thing for investors to understand is that they are required to report crypto holdings, gains, and losses to the IRS when filing their tax returns. If a cryptocurrency return is generated — positive or negative — or some type of income is realized from holdings, your crypto activity will need to be reported to the IRS. This is why it’s important to keep track of any and all crypto transactions.

Here are the basic steps to take when filing taxes on cryptocurrencies.

•   Determine what, if anything, is owed. If an investor completed a crypto transaction (selling, exchanging, or using to purchase a good or service), it is likely that it generated a tax liability.

•   Record and report transactions. All cryptocurrency transactions will need to be reported on your tax return. Like with stocks and other investments, the IRS requires a paper trail to ensure an individual reports their full tax liability. In some cases, crypto exchange will provide the transaction history for the investor via a 1099 form, or something similar.

•   File the correct forms with your tax return. The IRS requires specific forms depending on the activity an individual has conducted with their crypto. That could include making calculations on Form 8949 , and then reporting the results on Schedule D of Form 1040 , which outlines and summarizes capital gains or losses

Filing Crypto Taxes on Your Own

It is possible to figure out your crypto tax liabilities, and file on your own. But know that many experts may recommend against this, especially if you’re a particularly active crypto investor or trader. That’s because there can simply be so much information that needs to be reported, that it can be overwhelming for the typical person, and thus, hard to keep track of.

There are services that can help you keep track of your transactions, but if you’re using multiple exchanges or brokerages, and even some decentralized exchanges, you may miss a portion of your activity that needs to be reported.

If you only have a handful of crypto transactions to account for, you may be able to file your crypto taxes yourself. But it may be best to reach out to professionals for help.

How to Lower Crypto Tax Liability

If an investor is looking to lower their crypto tax liability (who isn’t looking for ways to reduce income taxes, and other taxes?), there are several options. Many of the same strategies that are used for traditional investments, like stocks, apply to crypto holdings. Here are a few examples:

Buy and Hold

The buy-and-hold strategy can help investors take advantage of the long-term capital gains tax rate, which is lower than the short-term capital gains tax rate as noted above. When an investor holds on to their crypto for at least one year, their tax rate for the crypto will be lower than if they sold within the first year.

Tax-Loss Harvesting

If a loss is realized on a crypto transaction, it can be used to offset the gains made on other holdings. This is called “tax-loss harvesting,” and is a common tactic used to lower tax liabilities on other investments. However, if an investor’s crypto is somehow stolen or lost, they are out of luck and won’t be able to apply the loss against their gains to lower their liability.

Investors can use tax-loss harvesting for their crypto holdings to offset as much as $3,000 in non-investment income. If they’ve incurred losses beyond that limit, they can carry forward those losses to use in future years.

Also, investors who are concerned about triggering wash sale rules in regards to their crypto sales have no reason to fear. Under current rules, wash sales do not apply to cryptocurrencies. (Though it’s generally expected that this will change at some point in the future.)

Charitable Donations

The IRS classifies crypto as property, and property donations are tax-deductible, and not subject to capital gains taxes.

Here’s how this might work in an investor’s favor: If an investor bought a Bitcoin for $10,000 more than a year ago, and it now has a value of $35,000, they would owe capital gains taxes on that $25,000 gain if they cashed out. But by donating it, they can avoid those capital gains taxes and also take a deduction “generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year,” according to the IRS .

Buy and Sell Cryptocurrency in 401(k) or IRA

Some tax-advantaged retirement accounts like a 401(k) or an IRA allow investors to add cryptocurrencies into their portfolios. In these accounts, no annual taxes are assessed on the transactions, since they enjoy tax-free growth. Investors can therefore take advantage of these benefits to trade within the accounts and not be taxed on every transaction.

However, depending on the type of account used, an investor may face taxes upon withdrawal. For instance, if you were to withdraw money from an IRA account prior to reaching age 59.5, you’d be subject to a 10% penalty.

Recommended: Guide to Bitcoin IRA: Pros, Cons, and What to Know

The Takeaway

Investors need to report their crypto activity to the IRS, and pay applicable tax liabilities. Most crypto activity is subject to capital gains taxes, but depending on the circumstances outlined above, cryptocurrency transactions and investments may be taxed as property, like stocks, or as income.

Investors should keep this in mind, remembering that cryptocurrency tax situations are nuanced and complicated. For that reason, it may be best to reach out to a tax professional for help when filing your taxes. But by keeping track of your crypto holdings and transactions, managing your cryptocurrency tax liabilities shouldn’t be too difficult.

FAQ

How much are crypto taxes?

The amount an investor owes in crypto taxes depends on several factors, including how much trading they did, and how much they profited from those trades. Income taxes may also be applicable, too.

When do your taxes for crypto investments need to be filed?

Investors need to report and pay applicable crypto taxes at the same time that they file their tax return. Generally, that’s due by mid-April, on Tax Day. Investors can ask for an extension, or even sign up for an installment plan if they can’t afford to pay their crypto taxes.

What happens if you don’t pay your crypto taxes?

If you don’t pay your crypto taxes (or fail to report your crypto activity to the IRS), you could incur financial penalties, or even jail time. If caught, you could be facing audits of several years’ of tax returns, and even face serious charges, such as tax evasion.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

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