As we approach the end of 2020, you may be reflecting on areas of improvement for the coming year. Maybe you would like to focus on your financial health. If this is important to you, you will likely be on the hunt for investment options that offer your investment’s best returns.
While traditional investment avenues like real estate and stock market securities have a high potential for returns, newer avenues promise equally excellent returns. You may be curious as to how viable cryptocurrencies are as an investment opportunity.
What is Cryptocurrency?
As the name suggests, cryptocurrency is currency—something you can use to buy or sell items. Unlike hard cash, however, it lacks a physical form; it only exists digitally, stored in virtual wallets on computer hard drives worldwide. Cryptocurrency is not backed by physical assets the way the conventional currency is.
The first part of its name refers to the fact that this currency is encrypted to guarantee its security.
Common examples of cryptocurrencies include Bitcoin, LiteCoin, Ripple, and Ethereum.
Tokens, Coins, and Blockchains
You may have heard the words ‘coin’ and ‘token’ used interchangeably in crypto circles, but they don’t necessarily refer to the same thing. Both of these are based on blockchain, the basic unit of cryptocurrency. Blockchain is a collection of blocks; a block is a store of information; in this case, information about virtual currency transactions.
When transactions happen, cryptocurrency miners verify and update the transactions in blocks until the block reaches capacity. Miners will update subsequent transactions in a new block, which will be ‘chained’ to the previous one in chronological order.
A cryptocurrency with its own stand-alone blockchain is known as a coin, while one built on an already existing blockchain is known as a token. The popular cryptocurrency Bitcoin is an excellent example of a coin. Bitcoin introduced the world to the first-ever blockchain. If you would like to invest in and trade bitcoin, then you may want to consider doing so via the Crypto Bank Plattform. There are, however, lots of places you can do this.
Types of Cryptocurrency
There are different types of crypto, each having its own distinguishing features. The features and utility of a cryptocurrency go a long way in determining its viability. Here are some features to look for when looking at any potential crypto investment:
- Rights – What rights are you entitled to when you buy into a given token? For instance, do you get voting rights within that particular currency’s ecosystem to decide on future projects’ funding?
- Value Exchange – Do the tokens of the cryptocurrency allow you to buy and sell or get rewarded for completed tasks within its internal economy? If tokens don’t create such markets, the crypto may not be worth the investment.
- Toll – crypto can be a gateway through which you access services on a particular platform. For instance, some tokens give you access to the processing power of cloud computers.
- Function – Holders of tokens in particular environments can add features that enrich their experience.
- Currency – The crypto should be a store of value, like conventional currency, allowing you to conduct transactions even outside of the cryptocurrency’s ecosystem.
Rules and Regulations
According to the Internal Revenue Service (IRS), digital currencies are not considered legal tender. There are, however, transactions conducted in the cryptocurrency ecosystem that is liable to taxation. The IRS views cryptocurrency as property, just as it does with real estate or stock market securities. In the same way, you’re responsible for paying capital gains tax when you sell a property that has appreciated, you will also be expected to declare and pay the same if you profited from your crypto dealings.
To remain in good graces, you first will need to keep clear records of your crypto transactions. Whether you bought or sold your share of a cryptocurrency or were engaged in cryptocurrency mining, you need to keep detailed records of these transactions and include them when filing your tax returns.
This is typically true no matter where in the world you are based – for example, if you live in Germany, this useful guide that explains wo kryptowährung kaufen (where to buy cryptocurrency) can help you to determine how to keep track of your records.
Recent changes have seen an explicit request for crypto transaction information included in Form 1040. Even if you were donated the crypto you got that year, the IRS wants you to declare it in the form.
Keeping tabs on your crypto transactions and correct filing can be a bit tricky, especially if you’re dealing with more than one cryptocurrency or multiple cryptocurrency exchanges. For this reason, you may want to consider hiring a cryptocurrency tax accountant who will help you record your transactions and accurately declare them to avoid looking shady to the IRS and incurring fines. Click here to learn more about cryptocurrency tax accountant services.
Getting Your 2021 Investment Right
For your 2021 investment to be successful, you need to do your homework beforehand. Be sure to research the current popular cryptocurrencies as well as any promising ones that are emerging. Figuring out how to efficiently and accurately complete your cryptocurrency tax from the get-go will ensure that all your transactions are well documented and filed using Crypto.