Let’s take a look at the billionaire CEOs vouching for cryptocurrencies and the tax implications of cryptocurrencies for crypto enthusiasts in 2021.
Through the years, cryptocurrency has made its way on to the headlines for its sudden influx. Today, billionaire CEOs like Elon Musk, Brian Armstrong, and the like vouch for cryptocurrency. Although they say that cryptocurrency is promising, they also make it clear that crypto comes with its own risks so that investors do not go all out.
Cryptocurrency is a new shiny diamond that everyone wants to have. While some users are educating themselves about the risks in investing in crypto, others are doing it for the fad and “for the ‘gram”.
This is all fine. What are some risk areas that crypto enthusiasts must look at and how should they approach the tax angle of cryptocurrencies?
The following will discuss in detail the evolution of cryptocurrency, its economy, tax reporting requirements, and the risks.
Evolution of Cryptocurrency
Cryptocurrency dates back to 1983 in its formation stages, where it started out as anonymous cryptographic electronic cash. This was further developed into various digital currency exchange experiences and lead to over 6000 variants of the cryptocurrency.
The initial reason behind this invention was to enable cashless anonymous transactions without the interference of any financial institutions or regulatory bodies. It is interesting to note that cryptocurrency boomed during the U.S. Fiscal Crisis in 2008.
Cryptocurrency in 2021
Today, cryptocurrency is dependent on blockchain technology for its function and security. However, due to investment influx, regulatory issues, and increased occurrences of financial crimes around the world through the use of crypto, cryptocurrency, as an emerging market, is being regulated by the federal agencies, such as the IRS.
Even though the transactions are still encrypted due to the inherent security functions of the technology, the regulatory bodies require crypto exchanges and platforms to provide transparent reports of transactions to dissolve global economic crimes and establish compliance.
Cryptocurrency: An Emerging Market & Economy
In 2021, the cryptocurrency is one of the fastest-growing markets around the world with its major stakes in Turkey with 97% Market Adoption.
Due to the anonymous trading enablement of the technology, the exact number of the investors is unknown.
However, a recent survey gathered responses, which concluded that 1 in 10 Americans invest in cryptocurrency [1].
Tax Reporting Requirements For Crypto
Just like stocks, shares, and other capital assets, cryptocurrencies are subject to federal taxes. Since IRS treats cryptocurrencies as capital assets, any capital gains you make on your virtual assets are subject to IRS taxes.
Forms like 1099-K, 1099-B, Form 5498, 1042-S, and more must be used to report crypto transactions appropriately.
Crypto investors, stakeholders, crypto exchanges, brokers, intermediaries, third parties, and others involved in a crypto transaction are required to report their transactions accurately and pay their taxes respectively.
Hiding your cryptocurrency incomes and profits will be treated as tax evasion, which would lead to IRS audits and severe penalty assessments.
Risks Of Investing In Cryptocurrencies
Just like any other investment, crypto enthusiasts are advised by experts to trade with caution.
Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth in New York was noted saying “There are a lot of things that make crypto very attractive; the biggest one is the opportunity to make a lot of money,”
“But it doesn’t change the fact that you’re still putting risk on your money,” Bonepath added.
“Unlike banks and stock exchanges, there are virtually no fail-safes to protect you if you make a mistake,” he said. “Cryptocurrencies allow you to be your own bank, which includes the responsibility of keeping your investments secure.”
Read the full statement here from CNBC.
Further, Nobel Prize-winning economist Paul Krugman has made public statements criticizing cryptocurrencies and warned his followers about the risks.Read his full statement here from The Independent.
In Conclusion
While the critiques are guiding factors in an unpredictable virtual market, it is up to you to decide where you want to put your hard-earned money. Every market is subject to inconsistencies and risks at the end of the day. But if you are leaning towards investing in the virtual currency, educate yourself thoroughly and make well-informed decisions.
And if you are looking for a way to manage your crypto taxes, look at the sleek Crypto Tax API solutions offered by Tax1099 and make your life a tad bit easier.