|By Nirali Chokshi|
|Bitcoin, Ripple, Ethereum, Litecoin – what do they have in common? These are all types of different cryptocurrencies.
You’ve heard a lot of these words in the news, articles, or amongst friends, but is this something you should get into? Should you buy/invest in them? That’s really for you to decide, but first you should understand the basics.
Cryptocurrency is a digital asset that is used as an exchange, similar to a dollar. It is not backed by a bank or government, but is encrypted and transferred peer-to-peer and recorded on a public ledger called blockchain. No single entity or person is in charge of the blockchain. In order for a transaction to be confirmed, mining (securing/adding/verifying transactions to a blockchain) must occur. As explained on the cryptocurrencyfacts.com website, “in order to add transactions to the blockchain, all of the miners collect the transactions recently broadcasted by other currency users, verify that the transactions are valid (according to the current blockchain), and compile them down into a transaction block.” These blockchain records cannot be edited or adjusted, and are publicly shared and verified.
So how is this anonymous then if it’s public? The cryptocurrency itself is not tied to your real name. A digital wallet stores your currency and a set of unique keys and a digital address is assigned to it. The transaction itself is public but it is possible to keep the identity of the transactors private.
The value of the cryptocurrency depends on the market, which means it can be very volatile. Therefore, enter at your own risk. More businesses need to come on board, and more usage brings more demand.
So how does this impact taxes?
Currently, cryptocurrency is treated as a property for tax purposes as described in the IRS Notice 2014-21. This means it is treated similar to a stock. If you receive revenue from investing in cryptocurrency, the costs of acquiring virtual currency through mining or similar activities should be expensed as they are incurred. Additionally, under the Tax Cuts and Jobs Act cryptocurrency transactions cannot be claimed under Section 1031.
If any of this has piqued your interest, there are many articles and books about cryptocurrency you should read (such as Blockchain Revolution and The Bitcoin Standard). Just like any good investor, do your research and understand your financial position. The answer to whether this is a good investment is still up in the air.
About the Author
Nirali Chokshi is a CPA working at her family’s accounting firm Chokshi Accounting & Tax Services in Orlando, FL. She graduated with her Masters from University of Central Florida in 2009.