Should You Invest Your Tax Refund in Crypto? Experts Weigh In

If you’ve received a tax refund from the IRS, it may feel like you suddenly have a lot of extra spending money in your pocket. But before you book a vacation or put money down on a big-ticket purchase, you might consider the experts’ recommendation: using your tax refund to better your financial situation.

Once you’ve paid down high-interest-rate debt and set aside an emergency fund, investing your tax refund can maximize your money’s impact. There are many ways to invest, from traditional approaches like an IRA or a brokerage account to alternative investments like cryptocurrencies.

If you’re considering investing your tax refund in crypto, this is what you need to know.

Cryptocurrency Investments: An Overview

Before considering investing a tax refund in cryptocurrencies, it’s important to have a firm understanding of the possible benefits, risks, and other considerations one should keep in mind before trading digital assets.

Cryptocurrency as an Investment

There are numerous ways to buy and sell cryptocurrencies, including directly via an exchange or indirectly through exchange-traded products, among other options. 

Regardless of how you invest, keep in mind that cryptocurrencies are high-risk ways to utilize your assets. The U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy urges investors to be cautious before dealing in digital assets. The reasons for this include the possibility that companies or individuals offering digital asset trading may not be in compliance with securities laws, that fraudsters remain a significant concern for the industry, and that cryptocurrencies tend to be highly volatile.

On the other hand, the Commodity Futures Trading Commission acknowledges that many of the technologies related to digital currencies have the potential to transform markets. This may lead to significant returns—besides being high-risk, cryptocurrencies also have the potential to generate large rewards.

Michael Casey, CFP, founder and president of AE Advisors in Virginia, said that “investing a tax return in Bitcoin could be a great way to start an initial investment or add to a position in this new asset class.”

Key Considerations Before Investing in Cryptocurrency

Investors should keep several things in mind before spending a tax refund on cryptocurrencies. These include making an assessment of risk tolerance, determining financial goals, and evaluating the conditions of the market.

Risk tolerance: The Federal Reserve Bank of Kansas City has found that cryptocurrency owners lacking in financial literacy and risk tolerance awareness may be particularly vulnerable. This is due to the high degree of volatility in the market and the lack of consumer protections compared to other industries. 

Simply because an investor has extra cash on hand after receiving a refund does not mean that their risk tolerance has changed; indeed, many experts argue that this is an especially important time to have a solid financial plan in place.

Financial goals: Every investor’s financial goals will be different, but regardless of your financial position it’s important to look at both short- and long-term goals before investing a tax refund. 

For Mark Wilson, APA, CFP, founder of MILE Wealth Management in California, the first goal after receiving a tax refund would be “building out or topping off an emergency fund.” Wilson acknowledged that “it’s boring, but three to six months of spending should be set aside in a high-yield savings account or higher-yielding money market fund; these funds will help you from scrambling when the inevitable financial surprise comes along.”

Market conditions: If you’ve determined that your risk tolerance is acceptable and that buying cryptocurrencies is part of your financial plan, keep in mind that market conditions may mean some times are better than others to invest. 

Consider the impact of the regulatory landscape, anticipated changes, and the latest trending news about cryptocurrencies. For many investors, dollar-cost averaging is a sensible way to invest in cryptocurrencies due to their extreme volatility.

Pros and Cons of Investing Your Refund in Cryptocurrency

Pros of Investing Tax Refund in Cryptocurrency

Two of the primary benefits of investing a tax refund in cryptocurrency are the potential for high returns and the ability to contribute diversification to a portfolio. The largest cryptocurrency by market capitalization, Bitcoin, has increased by nearly 142% in the year leading to January 28, 2025, and by more than 1,114% in the five years leading to that date. Many altcoins tend to follow Bitcoin’s movements, although this is not always the case.

Cryptocurrencies are unique compared to traditional asset classes in their structure, their decentralized status, and the murky regulatory landscape in which they exist. As such, some investors consider them to be a means of contributing diversification to a portfolio otherwise constructed of traditional asset classes like stocks, bonds, and commodities.

For Casey, Bitcoin offered the most attractive prospect for investors with some extra money to allocate after a tax refund. He said that “Bitcoin has the most secure network and the most global adoption,” making it preferable to other tokens that are often “too speculative in nature and have questionable long-term value.”

Casey also pointed out the advantages of the three primary ways to gain Bitcoin exposure. He says that self-custody is the “most advantageous but also has risks that need to be understood,” such as wallet security, trading fees, and so on. Having Bitcoin held by a digital custodian is a second option and one that takes some of the risk of self-custody out of the equation. Finally, Casey says that “the easiest way to gain price exposure is through shares of the Bitcoin spot ETFs and other ETFs that participate in the crypto ecosystem.”

Cons of Investing Tax Refund in Cryptocurrency

In contrast with Casey, Wilson saw “no connection” between receiving a tax refund and buying crypto assets. He suggested that “long before investing in crypto,” an investor should create or top off an emergency fund, pay off higher-yielding debt, and build out core investments. 

Wilson hinted at some of the potential concerns surrounding cryptocurrency investments for a tax refund, including volatility, regulatory uncertainty, and the high risk of loss. Even the leading cryptocurrencies—Bitcoin, Ether, and XRP—routinely experience major swings in trading price. The thousands of smaller cryptocurrencies can be even more unstable due to their thin trading volumes. This makes an investment in cryptocurrency highly speculative in nature—or, as Wilson describes it, a “gamble.”

Volatility often accompanies allegations of fraud in the cryptocurrency space. An all-too-common occurrence for recently launched altcoins is known as a “rug pull,” in which developers of a token abandon the project after raising capital, leaving investors holding a worthless coin. Other types of fraud are rampant as well, with various high-profile examples including the Bitconnect Ponzi scheme and the collapse of the exchange FTX.

Perhaps the single greatest disadvantage to cryptocurrency investment, however, is the high risk of loss of assets. Investors take on this risk when buying a volatile instrument like a digital asset, but there are plenty of other catastrophic reasons why loss may occur as well. 

1. Cryptocurrency thefts and hacks can leave wallets empty of tokens, and even well-established exchanges and custodians often become targets. 
2. There is no guarantee that a coin will continue to exist into the future; some analysts suggest that more than half of all cryptocurrencies that ever launched have subsequently failed.

If you are interested in a non-traditional investment for your tax refund but find that your risk tolerance does not fit with a cryptocurrency investment, there are a variety of other alternative investments you might consider instead. Tangible assets, real estate, or even private equity are all possibilities, depending upon the size of your capital base.

The Bottom Line

While there are potential benefits to investing a tax refund in cryptocurrencies—besides high returns, they can also provide diversification within a portfolio—there are also numerous risks. These include the danger posed by high volatility in the industry, regulatory uncertainty, and the risk of loss of assets, among others.

Before investing a tax refund in cryptocurrencies, it’s important to pause and evaluate your financial situation and goals. Consider your tolerance for a high-risk investment like digital assets and how it might impact your short- and long-term financial aims. It’s also worth evaluating the market—thousands of digital assets are available, and the space is constantly changing.

If you have decided to put your tax refund toward cryptocurrencies, make sure that you make an informed investment. Consider whether you’d like to gain access to the digital currency industry via direct investment and self-custody or whether you prefer an indirect means of exposure. Both come with potential benefits and risks that are important to keep in mind.

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