If you're going to play in the wild, wild west of cryptocurrency, make sure you have the right controls and tools in place to stay organized.
You have to represent your data well when it comes to tax time because you don't want to overpay in tax, and you want to be able to rely on data.
So far, there are no brokerage crypto statements coming out yet.
And if you're planning to play in this digital field, you have to have the checks and balances you need to properly report because that reporting piece is loose at best right now.
It depends on which coin you're dealing with, which platform you're dealing with, or how well-formed it is because there is no clearly defined regulation right now.
Frankly, it’s all being built.
What is cryptocurrency?
Cryptocurrency is defined as any form of currency that exists only digitally. It has no central issuing or regulating authority (ex. bank). Instead, it uses a decentralized system to record the transactions and manage the issuance of new units (blocks).
Cryptocurrency relies on cryptography to prevent counterfeiting and fraudulent transactions. Bitcoin, Ethereum, Litecoin, and Dogecoin are just some of the many cryptocurrency coins out there.
Is it legitimate?
As of June 2021, El Salvador has used Bitcoin as a legal tender. A lot of major corporations are now accepting it as well, including Microsoft, Paypal, Starbucks, Twitch, and Amazon Home Depot, among many others.
When you start talking about nations accepting it as legal tender and major corporations accepting it as payment, there's legitimacy to it.
Let's face it, people don't trust financial institutions. After the different crashes and things we've seen over the years, people don't trust banks and finance organizations to have their best interest. All it takes is one person doing the wrong thing and people get skeptical. they get worried about what's happening with their money.
The way crypto is meant to work removes the middleman. It has the ability to buy and sell things of great value, without going to the bank and having to go through all those validations and transactions as you would with any banking transaction.
An example of a crypto transaction:
Let's say you buy a coffee at Starbucks. You flash your phone to buy a coffee and this creates a transaction (block), which is then sent to all the nodes or everybody connected in the network to validate that you have enough blocks to pay for your coffee.
Once validated, they approve the transaction. The block is added to the existing blockchain and your transaction is complete. The blockchain refers to the history of transactions.
Tax Implications for Cryptocurrency
Everything with crypto is a taxable event. And as you're learning more about crypto, you could be saving money in merchant fees, which can quickly add up.
If you want to learn more about cryptocurrency basics, check out Episode 089: 2022 Cryptocurrency Basics & Tax Treatment.