Cryptocurrency is shaking up the banking industry the same way the internet is changing the entertainment industry. In 1791, Alexander Hamilton establishes the first bank in the U.S. and all currency and financial dealings begin to revolve around centralized banks. In 2008, the peer-to-peer electronic cash system known as Bitcoin introduces a new currency into the market called bitcoins. Rather than money printed by a bank or backed by a government, bitcoins are a virtual currency that uses a cryptographic encryption method to secure transfers and storage. Everything about bitcoins exists in digital form and is sent through the internet. Bitcoins are kept in a digital wallet on a computer or phone. Using them is as simple as sending an email.
What Are the Advantages of Cryptocurrency?
- They are accepted by many countries and businesses
- Transactions are person-to-person without going through bank
- Fees for transactions are lower than with traditional currency
- Accounts cannot be frozen
- There are no account prerequisites or limits
How Do You Get Bitcoins?
You obtain them from Bitcoin miners or as a payment for a product or service. Every financial exchange involving bitcoins is verified and recorded in a transparent public ledger or blockchain. Miners are paid with bitcoins for their work (mining). The fees charged for transactions generate new bitcoin currency. An encryption algorithm regulates the number of units created by each event.
Does the U.S. Government Recognize Bitcoins?
The U.S. Federal Reserve views financial transactions and investments using cryptocurrency as legal. The IRS requires users to report all buying, selling, investing or use of bitcoins. The United States and many countries, as well as worldwide businesses are accepting them. Unfortunately, not all bitcoin exchanges are reported. The international banking industry is concerned criminals use cryptocurrencies to hide illicit activities because overseas transactions are extremely difficult to track.
How Is Cryptocurrency Taxed?
The IRS views bitcoins as assets and are treated as intangible property, not currency. You must pay short-term or long-term capital gains tax on your use of cryptocurrency, depending on how long you have held onto the units. Bitcoins you mined and sold get taxed as personal or business income. Consulting a good tax lawyer or accountant to discuss your use of bitcoins is recommended.
Should I Invest in Bitcoin?
Cryptocurrency prices fluctuate wildly. The March 2018, the unit cost for one bitcoin (BTC) is $11,090.70. In July 2010, the unit cost was $.08. Many investors think a collapse of bitcoin’s price bubble seems likely, which would threaten Wall Street and the U.S. economy. Others think cryptocurrency is here to stay. Smaller altcoins have sprung up like Ethereum, Ripple, Bitcoin Cash and Cardano. Acquiring some of this cryptocurrency requires you buy bitcoins first and visit another website to make the exchange. Recently, hackers have targeted several smaller altcoin cryptocurrency companies, stealing millions and putting them out of business. Deciding to enter the bitcoin arena is up to you. Our advice – buyer beware and always have a good tax lawyer.
Dutton Legal Group – Indiana’s Tax Resolution Law Firm
Dutton Legal Group helps the people and businesses of Indiana navigate ever-changing State and Federal tax codes. Our goal as experienced tax attorneys is to assist you in finding an immediate, cost-effective answer to your tax challenges. We provide a variety of tax services from balance resolution and return preparation to wage garnishment relief and audit assistance. Stop worrying about your taxes and how the TCJA affects them. Make Dutton Legal Group your next call at 1-800-334-0255 or send an email to request a free consultation. Trustworthy and affordable, for over 15 years.