By now, you’ve probably heard your buddies chatting about all the money they’re raking in trading cryptos, and how they’ve figured it all out. Don’t feel like you’re behind the times if you have no idea what’s going on. Cryptocurrencies are the new kids on the block of the investment world, if you can even call them that. There’s still quite a lot to be learned from all this crypto mania.
Here are the basics on cryptocurrency, and what to watch out for if you decide to add them to your portfolio:
What is cryptocurrency?
Cryptocurrency is digital currency or virtual money that uses cryptography for security, namely blockchain in most cases. It isn’t issued by a central authority (i.e. a government), which makes it more appealing to some folks than traditional currency.
Should you invest in it?
This is a question we get alllll the time. The answer completely depends on whether you’re comfortable with your investment potentially going to $0. Cryptocurrencies are a speculative investment and are extremely risky and volatile. Keep in mind they’re very different from investing in a profitable company or business. Businesses sell a product or service and can generate revenue. Cryptos sell nothing and are only valuable assuming the next person believes they will become even more valuable. Do they serve some purpose? Yes. Just be aware that losing all your money is a very real possibility.
How do most people buy them?
For many people in the U.S., Coinbase is likely the easiest option for purchasing Bitcoin, Ethereum, and Litecoin. After verifying the account, an investor can add a number of payment methods including credit cards, U.S. bank accounts, or wire transfers. Note that some credit card companies are treating purchases of cryptos as cash advances, making them subject to higher rates than other purchases. The transactions aren’t anonymous, and the identity of the currency owner can be traced.
Why does the currency owner’s identity matter?
Well, if you’re buying or selling cryptos, your tax ID is linked to the account. The IRS will be able to figure out your transactions at some point, which makes it prudent to have solid recordkeeping now.
How does the IRS view cryptos anyway?
The Internal Revenue Service hasn’t quite caught up with the concept of cryptocurrencies either. But please don’t let that fool you: It will! And until that happens, you need to keep track of things. For taxation purposes, the IRS is currently treating cryptocurrency as property (like stocks, bonds, real estate, and other traditional investments). It’s not treated as currency…confusing, huh? Cryptos are subject to short and long-term capital gains taxes in most cases when held for investment.
Will you get year-end tax documents?
More than likely, nope. Unlike a traditional brokerage firm, crypto exchanges don’t automatically mail out tax paperwork. It’s on you to know your gains, losses, and tax liability come April.
How do you stay on the up and up?
Keep very thorough records of any transactions you make with cryptocurrencies. Most exchanges have downloadable transaction reports, which you should pull regularly and save with the rest of your tax documents. Then it’s up to you or your CPA to calculate what you may owe to the IRS at year-end. We always recommend consulting an accountant knowledgeable in the specific tax implications of cryptos. The last thing you want is the IRS to come knocking with a whopping tax bill you didn’t even know you owed.
Quite a few people have made, and more recently lost, a lot of money speculating on cryptocurrencies. Know the risks and potential issues of investing before you even consider entering into the market. There’s a lot more to cover, so please give us a call if you’d like to chat in greater detail. We’d be happy to answer any additional questions you may have!
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