Understanding Cryptocurrency

Casey McCartyCurrencyLeave a Comment

Editor’s note: All Bitcoin is cryptocurrency, but not all cryptocurrency is Bitcoin. To keep this article straightforward we will be avoiding several hundred types of cryptocurrency and mainly focus on Bitcoin. 

Cryptocurrency has recently become more popular due to an apparent bubble in the cryptocurrency market. Whether you like it or not, cryptocurrency will likely remain in the financial realm for the foreseeable future.

Note: buy cryptocurrency at your own risk. Do your homework and research thoroughly about any cryptocurrency you wish to buy before purchasing.

If you need help translating your cryptocurrency needs into tax talk, meet with Tom for any assistance in 2017 tax filing or 2018 tax preparation.

Why Bitcoin?

Part of the hype about cryptocurrency is how it differs from your typical standard currencies such as the U.S. dollar.

The most notable difference between the dollar and a Bitcoin is the lack of a centralized authority. Bitcoin is run by a network of computers operated by volunteer coders around planet Earth. It is not operated by a central government and banking system like the dollar. Each transaction only occurs once, with proof of its occurrence for all to see. This is ensured by a general ledger in which anyone in the world can see any Bitcoin transaction, when it happened and for how much.

“Man, so anyone in the world will know who I gave money to any time I give money to someone,” you may be thinking to yourself. Well, you’re wrong, kind of. Another benefit of Bitcoin transactions is pseudonymity, such that every transaction is from one digital wallet to another. You’ll only be identified by your wallet, not by your name or anything the general public could use to identify you. The Bitcoin marketplace simply checks if your wallet has enough funding for the transaction and has authorization for it.

Note: law enforcement has the means necessary to identify and track a user in Bitcoin, should it half to. Don’t break the law.

Bitcoin, how?

Bitcoin is “mined” through advanced computing processes. Once a Bitcoin is mined, it cannot be created again. The amount that can be mined decreased gradually every time another Bitcoin is mined. Unlike your dollar, there is a definite limit to how much Bitcoin can be mined.  The United States Federal Reserve could print out a bajillion dollars and the value of the dollar would still be equal to one dollar. That dollar would be worth significantly less relative to the rest of the world’s currencies, however. Because Bitcoin is finite, the value will theoretically only change due to market demands, not government controlled inflation. The thought is, if you invest now and Bitcoin eventually reaches that finite amount and the demand for Bitcoin goes up, the price will go up and you make money.

How do you pay for a $5 burger with a several thousand dollar Bitcoin? Simple, break up your Bitcoin into smaller parts. Coindesk.com states that Bitcoin is divisible up to one-hundred-millionths, or 0.00000001 Bitcoins. Because of this, Bitcoin can be traded as fractions of a whole, similar to how gold can be traded in factions of an ounce. How much Bitcoin you can get for $5 is dependent on how many dollars one Bitcoin is worth.

There’s also no take-backsies with Bitcoin, every transaction is final. There’s no overseeing authority that can reverse any transaction for you. The upside is that there’s also no way the general network can be tampered with to alter anyone else’s previous transactions.

Where to use cryptocurrency

Several major corporations are beginning to accept Bitcoin as payment, including overstock.com, Microsoft and Expedia. Coindesk.com does a good job explaining other major corporations that will accept Bitcoin. Smaller corporations, artists, start-up companies and individuals may also take Bitcoin as payment. The cryptocurrency is still in its early stages of use. Given the recent volatility of the Bitcoin, it’d be surprising to see Fortune 100 companies jumping on the bandwagon anytime soon.

Forewarnings

In its current form, cryptocurrency is risky. Essentially it’s a gamble, not an investment.

Bitcoin doubled in value from Thanksgiving to mid-December in 2017, and then lost half of its value from that mid-December to the end of January 2018. A price mapping of Bitcoin can be found here.

Another large risk pertaining to cryptocurrency is access. As cryptocurrency is an exclusively digital thing, each owner has a unique digital wallet which can only be accessed using that user’s unique password. As an added security feature, there is no way to recover a lost password. If you lose your unique password, you lose all access to your digital wallet. Sorry. Game over. Do not pass go, do not collect $200.

There’s also the risk that it may not even catch on. If you aren’t doing business with businesses that accept Bitcoin or the general public loses interest, it may be that you put your money in but won’t be able to get the same value out.

Finally, there’s the risk of a government crackdown on it. China recently began to crackdown on its citizens using it. If other nations follow suit, the global market means that other nations cracking down would have a negative affect on you as well.

Tax tackling

Yes, cryptocurrency is taxable.

The United States’ Internal Revenue Service views any money exchanged from cryptocurrency as a property transaction. Therefore, it is treated as the sale of a piece of property, and will be taxed similar to the sale of company stocks.

To make your life easier come tax time, keep a record of every cryptocurrency transaction you make, when it was made, and the value of whatever cryptocurrency was transacted at the time. Coin Tracker claims it can also help you with this task, though we cannot make any judgement about the app as we have not used it.

At tax time, you’ll need to file a Form 8949. If this tax jargon is confusing to you, meet with Tom for any assistance in 2017 tax filing or 2018 tax preparation.

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