dsmWealth: March 21, 2024

Cybercurrency gets a cautious stamp of legitimacy
BY STEVE DINNEN

Cybercurrencies like Bitcoin got a huge boost in January when the Securities and Exchange Commission cleared it for trading as exchange-traded funds. Since then, billions of dollars have poured into this investment vehicle, growing ETF giants like the Grayscale Bitcoin Trust, which has already amassed $27 billion.

But is it a good idea? Are investors wise, or wary, to put dollars into cybercurrencies that have shown themselves to be massively volatile and even prone to fraud. (Witness the collapse of the cryptocurrency trading platform FTX and the disappearance of billions of dollars of client money.)

Kelly Flynn, the chief investment officer for Prospective Value Partners here in Des Moines, sees the pros and cons. “As a citizen, I’m rooting for cybercurrency, on the belief that competition yields the best results,” he said. “Maybe this potential competition with the dollar will one day force us to come to terms with the deficit and debt.”

But as an investor, he’s not convinced. “I can see no way to value it, so to me it’s simply speculation, which I try to avoid,” he said. “I really have no idea where it will go, other than a hunch that it will be extremely volatile.”

Bitcoin, the cybercurrency giant, showcases this volatility. Its current price of $63,685 (near an all-time high) is 128% higher than a year ago. That’s 51% higher than two years ago but just 8.6% above its price three years ago in March. Over the past five years, its price has risen 1,455%, which compares well against current high-flying stocks Nvidia (up 1,980%), Tesla (up 1,068%) and Eli Lilly (up 659%).

Now that cybercurrency ETFs are allowed, institutional investors seem to be accepting their viability, said Toby White, an associate professor of finance and actuarial science at Drake University.

“These new ETFs appeal to some investors who couldn’t quite stomach traditional crypto trading but, due to the increased diversification and relatively lower/smoother volatility of the ETFs, are willing to finally get in the game,” White said.

He noted earlier that, despite the plethora of risk, certain investors find cybercurrency attractive, “especially among the younger generation who have less to lose and more to gain, who may be legitimately suitable for, and attracted to, the prospect of high returns in the short run.”

Curious about Bitcoin? Ask a finance student.
BY STEVE DINNEN

After my cybercurrency interview with Toby White, who teaches finance at Drake University, he talked about it with his students. And he learned a few things:

About half of the class had experience trading in cryptocurrency, mostly in Bitcoin. That was a higher percentage than he expected.

The students talked about the big swings they’d seen in very short periods of time but seemed comfortable with the high levels of risk.

A common strategy for success: Don’t try to time the crypto market but ride the waves, as with many other investments. Generally, the students believed that values would rise over the long term.

On the downside, students complained about the high transaction costs, sometimes as high as 3% per transaction. That doubles to 6% for flips, when you buy and then immediately sell. Some platforms offer lower fees, but those platforms tend to be riskier. (For example, their account values may not be insured by the FDIC.)

If you’re interested in investing in Bitcoin, there are thousands of Bitcoin ATMs scattered across the country, including at least 10 in Greater Des Moines, where you can buy a coin (or, more likely, a portion of a coin). Just find the machine and slip in some cash.

But keep in mind: There are especially heavy trading costs here. According to Crypto Dispensers, you can expect to pay fees of 10-23%, depending on your location, the total value of the transaction and the specific Bitcoin ATM provider.

Non-eligible HSA expenses: When a doctor's note isn't enough
BY KATELYN WASHINGTON FOR KIPLINGER

Maxing out your health savings account (HSA) contributions can significantly lower your tax bill, but using those funds for non-eligible items could get you into trouble with the IRS. And the agency may challenge certain purchases, even when consumers have a doctor’s note to justify them.

The fact is that sometimes, a physician's note isn't enough to make certain products eligible The IRS is warning taxpayers that some marketing campaigns misrepresent what is HSA-eligible and what isn’t.

Here’s what you need to know to avoid tax penalties from the IRS when it comes to HSA-eligible items.

Non-eligible HSA expenses

Food and wellness expenses are rarely considered HSA-eligible, despite the “food as medicine” movement that has swept the nation. Food items related to special diets, even when suggested by a doctor, can draw scrutiny from the IRS.

The same is true for other wellness items, such as fitness trackers and gym memberships. But that hasn’t stopped some companies from suggesting otherwise.

“Taxpayers should be careful to follow the rules amid some aggressive marketing that suggests personal expenditures on things like food for weight loss qualify for reimbursement when they don’t qualify as medical expenses,” IRS commissioner Danny Werfel said in a release.

Notes from doctors “based merely on self-reported health information” don’t qualify as legitimate documentation for making food and wellness products (or services) HSA-eligible.

To make what would normally be considered a personal expense (weight loss programs, nutritional drinks, etc.) HSA-eligible, the expense must be “related to a targeted diagnosis-specific activity or treatment.”

Note: The same rules apply to a flexible spending account (FSA).

HSA-eligible expenses

To avoid scrutiny from the IRS, consumers should skip receiving a doctor’s note from companies selling wellness items online. Instead, patients can see their doctors, whether in person or via telehealth and request a letter of medical necessity (LMN) and prescription for wellness items related to the treatment of their health conditions.

For example, doctors may recommend a gym membership to treat hypertension.

Doctors may write an LMN for a fitness tracker for a patient who suffers from obesity.

Supplemental nutrition drinks may be prescribed to patients with low appetites as a result of a chronic illness.

Of course, simply requesting an LMN from your doctor doesn’t guarantee you’ll receive one. But if you do have a legitimate doctor’s note, it is possible that the full cost of your purchase will not be considered HSA-eligible.

For food and beverages, only the portion of the expense that exceeds the cost of a product that “satisfies normal nutritional needs” is deductible. For example, if an enhanced drink costs $12, but a similar drink that merely satisfies normal nutrition needs costs $8, only $4 is deductible.

Using an HSA for fitness or weight loss

The IRS says taxpayers should not be afraid to use their HSA funds for qualifying expenses, but they should make sure they follow the rules and keep good records. Keep copies of LMNs, prescriptions and all receipts for eligible items, whether you made purchases with your HSA debit card or received a reimbursement.

Does HSA spending trigger an audit? The IRS doesn’t monitor how you spend your HSA funds throughout the year, but that doesn’t mean they won’t ask for proof that your expenses were eligible. And if your tax return contains unrelated IRS audit red flags, your risk for an HSA audit could increase.

If the IRS determines your expenses are not HSA-eligible, the ineligible expenses will be subject to income tax and a 20% penalty (if you are under age 65).

Also, make sure you don’t exceed HSA contribution limits each year.

If you made excess contributions, the IRS says you should withdraw the excess amount before the tax deadline (April 15, 2024) to avoid a 6% penalty.

What are the rules for an HSA when you turn 65? If you are 65 or older, you can take distributions for any reason without paying the 20% penalty. However, distributions for expenses that are not HSA-eligible are still subject to ordinary income tax. However, if you enroll in Medicare, you will no longer be eligible to make HSA contributions.

Shrinkflation: Why you may be getting less for your money
BY LORIE KONISH FOR CNBC

Some grocery store products are providing less for your money. And everyone from President Joe Biden to Cookie Monster has noticed.

Blame shrinkflation. The term, which is increasingly used in conversation, refers to products becoming smaller in size, weight or quantity as their prices stay the same or even increase.

Biden took companies to task for shrinking sports drinks and ice cream cartons and providing fewer chips in snack bags, in a pre-Super Bowl video posted on social media.

At the State of the Union, he again took a stand against shrinkflation, complaining that Snickers bars have become smaller.

Mars, the company that makes Snickers, denies the allegation. “The size of Snickers singles and share bars in the U.S. hasn’t been reduced,” a spokesperson for the company said in a statement.

In a more lighthearted exchange, when Cookie Monster posted “Me hate shrinkflation!” on X earlier this month, the White House responded, “C is for consumers getting ripped off.”

“President Biden is calling on companies to put a stop to shrinkflation,” the White House said.

The president has called for a bill to be passed that would give the Federal Trade Commission the authority to put regulations into effect to curb shrinkflation. The proposal would also make it possible for the FTC and state attorneys general to engage in civil actions against companies that engage in the practice.

Where consumers may see shrinkflation

For now, it’s up to consumers to spot the changes companies may make to their products. Certain products tend to be more susceptible to charges of shrinkflation, according to Bureau of Labor Statistics data cited in a recent Senate report.

Household paper products had the largest measured price increase change due to shrinkflation from January 2019 to October 2023, with a 10.3% increase.

Other categories that saw notable changes in that time frame include snacks, which increased by 9.8%; household-cleaning products, up 7.3%; coffee, 7.2%; candy and chewing gum and ice cream and related products, 7%.

Noticing the changes requires having a keen eye and diligently paying attention, according to Mara Weinraub, senior lifestyle editor of groceries at food website the Kitchn.

It can be easier to track those changes if you typically buy your groceries online or if you belong to a grocery store’s loyalty program. Some families even track their grocery store shopping by hand, Weinraub said.

If you’re watching for changes, you’re more likely to spot when a bag of popcorn shrinks from 5 ounces to 4.5 ounces, she said.

Shrinkflation isn’t necessarily new. But there are reasons why consumers are paying more attention to it now, Weinraub said. Social media makes it easier to share experiences with downsized products.

Meanwhile, companies are generally posting profits while engaging in this practice, she said. “There’s a layer of deception that they feel like, ‘Oh, this is something that companies are trying to do under the radar without us noticing.’"

Why critics say shrinkflation is the wrong focus

While shrinkflation is now under the political spotlight, not all experts agree the emphasis is correctly placed.

Inflation peaked at 40-year highs in 2022. While the rate of inflation has come down, it is still higher than the Federal Reserve’s target.

The Bureau of Labor Statistics tracks changes in the sizes of consumer products in order to accurately capture the changes in prices for goods and services in the consumer price index.

While consumers may notice shrinkflation at the grocery store, it has a very small impact on the overall inflation picture they face, the Bureau of Labor Statistics said in 2023 article.

Shrinkflation is rarer than politicians are depicting and not as influential on consumers’ lives, argues economist Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University. “Ultimately, consumers’ lives are harder because of inflation,” she said.

Notably, the categories most affected, such as snack products, are areas where consumers may refrain from purchases or substitute other goods, she said.

Most economists are not paying close attention to shrinkflation, contending its effects are eventually absorbed in inflation data.

But “I understand how with the average person it would frustrate and annoy them,” said David Doyle, head of economics at Macquarie.

How to be a smarter shopper at the grocery store

While consumers cannot control the changes companies make to grocery store products, they can take steps to be more mindful of how much they are spending.

Switching to a different brand may be one way to save, according to the Kitchn’s Weinraub, particularly by opting for store brands. Many stores are expanding their private label lines, which are generally cheaper than brand names, she said.

Taking the time to do some comparison shopping can also help, Weinraub said.

One staff writer at the Kitchn experimented by shopping in person at the grocery store for one month and then buying exclusively online for another month. She was shocked when she compared her receipts, discovering she spent over twice as much in person, Weinraub said.

Avoiding those in-person impulse purchases may help you save more than you think, she said.
Other shoppers have switched retailers and found that change “literally saved them hundreds of dollars,” Weinraub said.

“These strategies become increasingly important, as the prices continue to either maintain or creep up, or you seem to be getting less for the same amount of money,” she said. “You need to get more creative to stretch your dollar further.”