A cryptocurrency is a decentralized digital coin. It allows users to make transactions and store the currency in a secure manner using an alias. Blockchain is the critical and differentiating infrastructure that underlies cryptocurrencies. The blockchain is essentially a log or history that is resistant to editing because it has no single owner.
Cryptocurrencies:
- Trade on digital exchanges, can be block traded and options/futures can be bought on offshore exchanges
- As a category do not have a natural supply limit, unlike metals, such as gold
- Total market cap equates to less than 2% of the value of all the mined gold in the world1
- Top cryptocurrencies by market cap2
- Bitcoin
- Ethereum
- Bitcoin Cash
- Ripple
- Litecoin
- Dash
- IOTA
- NEO
Potential benefits of cryptocurrencies:
- Easier to transfer funds
- Difficult to counterfeit because of security features
- Blockchain is used to store an online ledger of all transactions that have ever been conducted
- By design, a new blockchain is created every 10 minutes
Potential risks of cryptocurrencies:
- A digital currency does not have a central repository, so it could be wiped out by a computer crash if a backup copy does not exist
- Threat of hacking digital wallets, exchanges or the cryptocurrency company itself
- Given they operate across geographic and jurisdictional borders, ambiguity as to their legal and tax status
- Uncertainty whether cryptocurrencies are a currency or commodity (varies by country, government and application)
Tax considerations if you’ve invested in cryptocurrencies:
In 2017, the rising price of cryptocurrencies raised a general awareness among taxpayers as to associated income tax issues. Because US tax law treats cryptocurrency positions as a type of intangible personal property and not as “money,” even casual transactions into and out of cryptocurrencies can create tax reporting obligations that might not be intuitive.
If you’re invested in crypotcurrencies, be sure to make your Ayco advisor, coach or your personal income tax advisors or preparers aware of any transactions such as:
- Exchanging cryptocurrency positions for the US dollar, for a foreign currency or a different cryptocurrency
- Using any cryptocurrency to purchase goods or services
- Acquiring any cryptocurrency position using any property other than US dollars
- Any charitable donations of cryptocurrency positions
