Should You Invest Your Tax Refund in Crypto?

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  • Many people received a generous tax refund this year.
  • Before you put your money into crypto, you need to understand the risks involved and have your other finances squared away first.

It may or may not be a good idea, so here's how to know.

Most people who file a tax return wind up with money back from the IRS. And this year, the average tax refund as of late April came to $3,103.

Of course, you may be sitting on a larger or smaller refund, depending on your financial situation. But either way, if you now have access to a pile of cash, it's important to put it to good use.

One option is to invest your tax refund, and to that end, you have choices. You could invest your money in cryptocurrency -- something many investors have jumped on over the past few years. But is that the right move for you? Ask yourself these questions to find out.

1. Do I have a full emergency fund?

The pandemic taught us the hard way that it's important to have money in the bank for emergencies. And so if you don't have enough cash in your savings account to cover at least three full months of essential bills, then the first thing you should do with your tax refund is bank it. Investing is a smart thing to do, but only once you've covered yourself with solid emergency savings.

2. Do I have any unhealthy debt?

If you owe money on your credit cards, you're better off using your tax refund to pay down your debt before you invest. The longer you carry a balance, the more interest you're apt to accrue. Plus, carrying too much credit card debt could actually damage your credit score, making it harder to get a loan (or an affordable one) when you need to.

3. Do I understand the risks of buying crypto?

There are a lot of people out there who have made money by purchasing crypto. But there are risks involved in owning digital currencies. The crypto market is extremely volatile, and so if you load up on digital coins, you run the risk of potentially losing money overnight. Also, we don't know what rules might come down the pike that change the way crypto can be traded, sold, and used. So if you're thinking of investing your tax refund in crypto, make sure you understand exactly what you're signing up for.

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4. Is there a more suitable investment for me?

Your goal in buying crypto may be to make money. But there may also be a lower-risk means of achieving that goal. If you fill your portfolio with stocks, you'll still be subject to volatility -- but perhaps not to the same degree as you would be with crypto. Also, stocks have been around a lot longer than crypto has, and that says something about their staying power. Crypto is fairly new, and while it may be around 20 years from now, we just don't know if that will be the case.

Investing your tax refund isn't a bad idea at all, especially if you're all set with emergency savings and have no unhealthy debt. But before you buy crypto, make sure it's the right choice for you and that you understand the risks you're taking on in the process.

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