Blog Part 1 of 2
This seems to be the subject of the hour. In every news outlet and financial news platform there is a mention of Bitcoin (BTC), Altcoin (Ethereum, Stellar, Etc.) or even Dogecoin (DOGE). Is this a bubble or is it the future of money? No one knows! I am not going to give you financial advice but I can provide you with the known tax implications of transactions involving cryptocurrency.
What is cryptocurrency?
In short, cryptocurrency is an award provided to users for staking their computer power to confirm various transactions. According to SoFi, as of April 2021, there are almost 10,000 cryptocurrencies with a market cap of $2 trillion; Bitcoin has the largest market share with approximately $1 trillion in market share.
Why are people afraid of cryptocurrency?
Cryptocurrency is a highly speculative asset and it does not have any intrinsic value. With the exception of StableCoins (Coins that are backed by Fiat, dollar for dollar), most cryptocurrencies can’t be used to buy any good or services on a large scale.
Why are people interested in cryptocurrency?
There are a myriad of reasons why people are in interested in cryptocurrency . Some of the major reasons are fear of inflation due to the Fed’s unlimited supply of stimulus money to combat the Covid-19 aftermath, increase in adoption of cryptocurrency by institutional investors, the various applications that governs the cryptocurrencies, and significantly cheaper transaction fees to move money compared to traditional banks. Unlike Fiat (paper currency), cryptocurrency is decentralized; there is not an entity that controls the supply.
What is Bitcoin?
Bitcoin is a cryptocurrency that hit the market back in 2008 and began use in 2009. Bitcoin is a “decentralized digital currency,” meaning that it has no central bank or single administrator and it can be sent using the “peer-to-peer bitcoin network” to purchase goods or pay for services. Bitcoin, unlike a number of other cryptocurrencies, has a limited supply of 21 million coins. A 2020 survey by HSB reveals that 36% of small-medium businesses in the US accept Bitcoin (BTC). Some of the most well-known US companies accepting Bitcoin right now are:
- Burger King
- Dallas Mavericks
- Miami Dolphins
- Virgin Galactic
What is Altcoin?
Altcoins are cryptocurrencies other than Bitcoin. They account for roughly 40% of the total market capitalization of cryptocurrencies. Due to AltCoins being derived from Bitcoin, the price tends to mimic the movement of Bitcoin. You can think of it like an S&P 500 Index Fund following the movement of the S&P 500. Some popular examples include Ether (ETH), Ripple, Litecoin, and Bitcoin Cash. The main difference between Bitcoin and Altcoins has to do with the issuance of coins. Bitcoin only has 21 million coins in existence and cannot create any more coins. Altcoins however, do not have a cap on the number of coins that can be issued.
What is DogeCoin? And why do we keep hearing about it?
Dogecoin (DOGE) is a cryptocurrency that started as a joke back in 2013 with an initial value of $0.0005739. The logo of the coin is a breed of dog, the Shiba Inu, which is featured in a famous meme. The coin has been used to tip contributors for their content on Twitter and Reddit. In recent news, the market value of the coin has skyrocketed (no pun intended) after Elon Musk tweeted his support for the coin. For context, if a taxpayer had placed $1,000 into DogeCoin on Jan. 1, 2021, at a price of less than a cent per coin, the initial $1,000 investment would be worth $81,365 on July 13th, 2021. A 8,136 % ROI is not bad for a cryptocurrency originally created as a joke.
Why is the IRS interested in cryptocurrency?
Prior to listing of Coinbase on Nasdaq, the majority of cryptocurrency trading was done through peer-to -peer exchanges that flew under the radar. Coinbase is an online exchange where people can buy, sell transfer and store cryptocurrency. Early adopters who owned thousands of Bitcoin when the value was about 10 cents unloaded their coins for a huge gain and the profits went unreported. The IRS took notice and started monitoring these exchanges and demanded a list of traders and a list of their transactions. In 2019, the IRS added a question to Schedule 1 of Form 1040 asking if the taxpayer traded cryptocurrency. And in 2020, the question has come to the front and center of the Form 1040 on Page 1.
Our takeaway? The IRS is cracking down on crypto transactions.
Tune in next week to learn what this may mean for you and any tax implications you should be aware of.
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