If you have been searching for ways to diversify your investment portfolio, you may wish to educate yourself about cryptocurrencies. Many investors have profited greatly from investing in these various types of virtual money ever since they became available in the early nineties. As with any investment, however, others have lost money.
Basically, a cryptocurrency is a digital asset that works as an exchange medium. You can buy and sell cryptocurrencies as well as use them to purchase many types of consumer goods.
A cryptocurrency system consists of the following six features:
- It does not require a centralized authority.
- It keeps track of how many of its units exist and which accounts own them.
- It defines if and when new units can be created.
- It offers ownership of its units by means of highly sophisticated cryptography.
- It provides the means by which ownership can be changed from one account holder to another.
- It does not allow more than one cryptocurrency transaction at the same time, thereby preventing fraud.
Types of Cryptocurrencies
Many kinds of cryptocurrencies exist, such as the following most widely known ones:
- Bitcoin
- Bitcoin Cash
- Ethereum
- Ethereum Classic
- Litecoin
- Ripple
Many people refer to all non-Bitcoin cryptocurrencies as alternative digital currencies or Altcoins.
Where to Buy
Online companies such as Cryptocurrency Forex Brokers provide a full list of cryptocurrency brokers, many of which not only sell them but also provide opportunities for account funding with them.
One of the advantages of investing in cryptocurrencies is that all your buying, selling and exchanging activities usually can be done on a pseudonymous basis. When you open an account, you seldom need to provide any identification other than a digital address. Most brokers do not require you to provide your name, address, underlying bank account number, or any other kind of personal identification.
When you want to sell or trade units, often called crypto tokens, of the cryptocurrency you own, all you need do is instruct the system how many units you want to sell or trade, verify the address of your account, and give the account address to which you want your units sent. Bear in mind that the account numbers are all public keys. This means that all account holders can see them. They cannot, however, see whose accounts they are. When you verify ownership of your account, you do so by means of entering your private key that no one else knows. When your transaction has been completed, your account will have been debited the appropriate number of unique units and the buyer’s account will have been credited with receipt of them.
Tax Considerations
Since no governmental body serves as a central authority for any cryptocurrency, reporting your gains and losses to the IRS basically requires your honesty. The Internal Revenue Service has decreed since 2014 that anything you purchase using any type of digital currency must be taxed as a capital gain when you trade or cash out of it if you make a profit This is because the IRS considers cryptocurrencies as property, not currencies.
Despite this requirement, the IRS does not require crypto-brokers to send out 1099 forms to their account holders or to the IRS. This puts the responsibility for reporting your gains squarely on you. Keep in mind, however, that should the IRS somehow catch you failing to report your gains, this constitutes a form of tax evasion for which you could face severe penalties.
Not only must you report your gains, if you hold a block of crypto tokens longer than one year before selling or otherwise getting rid of them, then your profits constitute a long-term capital gain. Should you lose money on your cryptocurrency investment(s), you cannot deduct them against future tax years.
