What is Cryptocurrency?
Virtual currency (or crypto currency) is a medium of exchange using cryptography to secure transactions and control the creation of new units. Cryptocurrencies are a subset of alternative currencies, specifically digital currencies. Bitcoin became the first decentralized Cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created.
Where to buy Virtual Currencies (VC)?
Your first step into the cryptocurrency world will probably occur through an exchange. There are two main types of exchanges:
- The first type of exchange is usually referred to as a fiat exchange. This exchange allows the direct transfer of US Dollars, Euros, and most government-backed currencies to be traded for Cryptocurrency.
- The second type of exchange is cryptocurrency-to-cryptocurrency exchanges, which allow cryptocurrencies to be traded with each other. For example, a common pairing on the exchanges is Litecoin and Ethereum.
You will need to use specific exchanges depending on what Cryptocurrency you are trying to purchase. To get most cryptocurrencies, you need to use both types of exchanges. This is because laws and regulations around specific cryptocurrencies make selling them difficult for fiat exchanges.
Each exchange has different pros and cons, so the best exchange for one person might not be the best for another.
What are the different types of Cryptocurrency?
Currently, no defined terms are accepted uniformly across the industry. However, there are various types of cryptocurrencies – Bitcoin, Litecoin, Altcoins, Ethereum, and Ripple where the blockchain’s primary purpose is the exchange of cryptocurrency tokens.
Is Cryptocurrency regulated?
It is a decentralized cryptocurrency, and that makes a big difference. A decentralized currency has no center of control, and nobody can change the rules unilaterally without the users’ approval.
What are the benefits and drawbacks of Virtual currencies?
- Decentralized: VC operates on a decentralized network, meaning no single entity or organization controls them. This provides greater autonomy and control to users.
- Security: Transactions made using virtual currencies are highly secure and difficult to forge. This is due to the advanced cryptographic algorithms that underlie their operation.
- Privacy: Transactions made using VC can be conducted anonymously, providing greater privacy and security to users.
- Accessibility: Anyone with an internet connection can access and use virtual currencies, regardless of location or nationality.
- Low transaction fees: Transactions made using virtual currencies typically incur lower costs than traditional payment methods.
- Volatility: Virtual currencies are highly volatile and subject to sudden fluctuations in value. This makes them a risky investment option.
- Lack of regulation: Virtual currencies are not regulated by any government or financial institution, which can make them more susceptible to fraud and other illegal activities.
- Limited acceptance: Although virtual currencies are gaining wider acceptance, they are still not accepted by many merchants and businesses.
- Complexity: Virtual currencies can be challenging to understand and use, especially for those not technically savvy.
- Security risks: Virtual currencies are vulnerable to cyber attacks, and users must take extra precautions to secure their digital wallets and prevent theft.
Cryptocurrencies make it easier to transfer funds between two parties in a transaction.
- These transfers are facilitated through public and private keys for security purposes. In addition, these fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.
Crypto 101 – How to Buy Virtual Currency
When selecting the best cryptocurrency exchange for yourself, there are many factors to consider.
- How safe are the website and server? Secure exchanges are better.
- How is the liquidity? The higher the exchange’s volume, the better.
- What are the exchanges fees? The lower, the better.
- How is the exchange’s customer support?
- What trading pairs are available?
- How many different payment options does it have?
- Is the exchange beginner friendly?
Central to the appeal and function of Virtual Currency is blockchain technology.
- It uses to store an online ledger of all the transactions that have ever been conducted using VC. This provides a data structure for the ledger that is exposed to a limited threat from hackers. It can be copied across all computers running cryptocurrency software.
- In addition, every new block generated must be verified by the ledgers of each user on the market, making it almost impossible to forge transaction histories. Many experts see this blockchain as having important uses in online voting and crowdfunding technologies. In addition, major financial institutions see potential in cryptocurrencies to lower transaction costs by making payment processing more efficient.
However, because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.
The anonymous nature of cryptocurrency transactions makes them well-suited for various nefarious activities, such as money laundering and tax evasion. However, cryptocurrency advocates often value anonymity highly. Some economists also consider cryptocurrencies to be a short-lived fad or speculative bubble – especially concerning that the currency units, such as Bitcoins, are not rooted in material goods. Bitcoin has indeed experienced some rapid surges and collapses in value.
Cryptocurrencies are not immune to the threat of hacking. As recent as June 2018, a South Korea Exchange, Conrail, lost approximately $40M worth of currency, and the value of Bitcoin lost 7% of its overall trading value within the first 24 hours.
Over the past decade, you may have heard that the US Department of Treasury has cracked down on US citizens’ money or investments in foreign bank accounts. Switzerland has been known as a tax haven for the wealthy and unscrupulous to hide wads of cash. However, the Swiss banking laws provided anonymity… or at least they did until recently. Not to fight the US Department of Justice (DOJ), the Swiss bankers, Credit Suisse, and UBS handed over hundreds of thousands of account information records.
Now, the DOJ is going after the foreign exchanges. The largest of these handed over 14,000 account records in March 2018 so as not to deal with the US. Many more are likely to follow suit. The exchanges’ terms of service stipulate that they will turn over this information if a government agency asks. Some information courtesy of Investopedia.
We would be remiss not to mention Nonfungible Tokens.
Nonfungible tokens (NFTs) are unique digital assets stored on a blockchain or a decentralized digital ledger that allows for secure and transparent transactions. Unlike fungible assets like cryptocurrencies, where each unit is interchangeable and of equal value, NFTs are one-of-a-kind and cannot be replicated.
- NFTs can represent anything from digital art, music, videos, and other creative works, to virtual real estate, collectibles, and even tweets. In addition, each NFT contains a unique code that verifies its authenticity and ownership, making it valuable to collectors and investors.
- NFTs are typically bought and sold on specialized NFT marketplaces, using cryptocurrencies as payment. The ownership and transaction history of NFTs is publicly recorded on the blockchain, which allows for transparency and proof of ownership.
- NFTs have gained popularity in recent years as a new way for artists and creators to monetize their digital content and for collectors to invest in unique digital assets.
If you or someone you know is involved in the exciting world of Virtual Currency, it’s essential to be aware of the tax implications. That’s where I come in! I strongly recommend scheduling a meeting with me to explore any possible income tax return reporting or foreign bank account filings that may be required. Being proactive can save you from potentially huge penalties and fines.
So don’t wait to get the facts. Let’s chat! Call Advanced Crypto Tax Expert Jeffrey Schneider, EA, CTRS, ACT-E, at 772-33-1040 to book your free strategy session.
In the United States, the Internal Revenue Service (IRS) treats virtual currencies as property for tax purposes. This means virtual currency transactions are subject to capital gains tax, income tax, or both, depending on the circumstances. Here are some essential tax rules for virtual currency:
- Capital gains tax: If you sell or exchange virtual currency for a profit, you must pay capital gains tax on the difference between the purchase and sale prices. The tax rate varies depending on your income level and how long you held the virtual currency before selling it.
- Income tax: If you are paid in virtual currency for goods or services you provide, the fair market value of the virtual currency at the time of receipt is considered income and must be reported on your tax return. You must pay income tax on this amount.
- Reporting requirements: If you have more than $10,000 worth of virtual currency in a foreign account, you must report it to the IRS on Form 114, Report of Foreign Bank and Financial Accounts (FBAR). You may also be required to report virtual currency holdings on your tax return, depending on the amount and type of virtual currency.
- Mining: If you mine virtual currency, the fair market value of the virtual currency at the time you receive it is considered income and must be reported on your tax return. You may also be able to deduct mining-related expenses, such as electricity and equipment costs.
It is essential to consult with a crypto tax professional to ensure compliance with all applicable tax laws and regulations related to virtual currency. Jeffrey Schneider, EA, CTRS, ACT-E, is one such professional. Call him at 772-337-1040 to book your free strategy session or at https://go.oncehub.com/SFSTax.