Cryptocurrencies seem to be the latest craze in the investment world. Prompted by reports of exponential gains, shareholders have invested in Bitcoin and other digital currencies, hoping they will appreciate. Some see crypto as a way of diversifying investment portfolios, buying altcoins, and speculating that value will spike over time, as happened in the past with bitcoin.
Before leaping into an investment, it’s wise to research crypto origins. Like paper money, developers created cryptocurrency to facilitate the exchange of goods and services. But unlike fiat currency, crypto would not be subject to government regulation.
Fundamental Cryptocurrency Information
Though digital currency history can be traced back to the 1980s, cryptocurrencies didn’t emerge until 2009 when a developer invented Bitcoin. This currency did not have a physical form and lacked government regulation. Instead, it consisted of virtual tokens stored on computers in different locations around the world.
Over time, other developers created alternative cryptocurrencies, including Litecoin, Ethereum, and Namecoin. Today, over 6,000 different cryptocurrencies are available to invest in and trade.
As the name suggests, cryptocurrency is made secure by complex encryption protocols. The blockchain, an encrypted record of transactions made up of blocks that contain transaction data, is central to the existence and use of cryptocurrency.
Cryptocurrency is used to buy and sell goods and services online and offline, though it is yet to be fully embraced by vendors globally. However, crypto is gaining traction as a means of investment. Investors can open an account with a crypto exchange and purchase units of preferred currency. After purchasing the selected tender, account-holders wait for the unit price of the currency to rise.
It’s crucial to note cryptocurrencies can be highly volatile, subject to sudden rises and drops in value. Bitcoin’s value was $9,545 at the beginning of 2020, dropped to $6,483 by March, and closed the year at over $28,000.
The Hands-off Approach to Crypto Regulation
Globally, cryptocurrencies are not centrally regulated how the dollar, for instance, is overseen by the U.S. Federal Reserve. The fact that it is not backed by any physical currency or valuable asset has made some potential investors shy away from crypto. Additionally, some governments’ efforts to inform their citizenry of the risk cryptocurrency investment entails have further served to deter the more cautious.
Though governments don’t regulate cryptocurrencies, they have been working to enact measures to curb their use for illegal activity. A few months ago, the U.S. national government published a Cryptocurrency Enforcement Framework to investigate and prosecute illicit crypto activities. Under this initiative, the government will put those using anonymity-enhancing cryptocurrencies under tight scrutiny.
While governments have taken such measures, they are reluctant to over-police crypto to avoid discouraging investment. Some state governments have ratified legislation to exempt crypto investors from state security laws, while others have permitted residents to pay taxes using digital currencies.
Cryptocurrency and Tax Obligations
Speaking of tariffs, cryptocurrency investments and other uses of cryptocurrency are subject to tax. Records of all crypto transactions should be carefully maintained so tax returns can be filed and comply with laws established by Uncle Sam. There are several ways in which investors can be liable for tax payments.
Vended products and services paid for with Bitcoin or any other virtual currency are expected to be reported as income. They are subject to designated duties by the Internal Revenue Service. The IRS expects cryptocurrency mining or crypto compensation scenarios to be filed as ordinary income sources. Self-employed currency miners are considered sole proprietors by the IRS, and self-employment tax may be due.
Concerning cryptocurrency speculation purchases, if coin value grew over one year, the IRS adds a capital gains duty. In this respect, crypto is considered an appreciated asset and is equally taxed.
Help with Cryptocurrency Tax Filing
Keeping track of crypto transactions and filing returns correctly can be a challenge. IRS imposes penalties if details are overlooked while filing or submitted documents are incompliant with current standards. For this reason, professionals are available to help verify tax requirements. Click here to learn more about crypto tax accounting services.
Jumping in With Open Eyes
There are indeed people who have made windfalls from Bitcoin, and future large-scale financial gains are possible. But before investing, it is essential to learn more about virtual currencies. With engaging in crypto trading and investing come necessary risks and great potentials for rewards. Ensuring full legal compliance and becoming acquainted with current tax law is of utmost importance before engaging in cryptocurrency-related activities.
