The United States Internal Revenue Service (IRS) does not recognize cryptocurrency as currency for federal income tax reporting purposes. However, it does recognize certain types of virtual currencies as property for capital gains and losses. If you are an American citizen living abroad and hold crypto assets, whether those assets are purchased directly or indirectly, you must report them on Form 8949, Sales and other Dispositions of Capital Assets.
In addition, if you trade digital currencies for profit, you must pay taxes on the gain or loss. You must determine what type of cryptocurrency you sold, and use the appropriate form to report the sale. For example, if you bought bitcoin in 2017 and sold it today for $10,000, you must report the transaction on Form 8949, Schedule D, Capital Gains and Losses.
If you traded Bitcoins for profit in 2018, you must report the sale on Form 8814, Sales of Virtual Currency Exchanges. You must provide information about the date and amount of each sale, along with the cost basis of the asset. This includes the total sales price, the number of units sold, and the fair market value of the unit at the time of the sale.
In this article, we will cover everything you need to know about crypto, how it works and most importantly, how it’s taxed.
What is blockchain?
A blockchain is a digital ledger which records transactions between two parties efficiently and securely. Just imagine a gigantic book as it is basically an automated decentralized book of transactions.
It’s usually decentralized, but you can centralize a blockchain, although that would take away most of the benefits of having a blockchain. Nobody wants a blockchain to be centralized.
A lot of people believe that the blockchain is a viable alternative to deeds for real property. Deeds are tracking from owner to owner every transaction involving the ownership of the real property itself.The blockchain is the same thing. With the blockchain, if you want to track something, we can use this digital ledger to track it.
The blockchain is the bedrock of all of these digital assets that we will deal with today. The blockchain is what keeps track of cryptocurrency transactions. Likewise, for non-fungible token transactions, and defi transactions.
When you have cryptocurrency or NFTs or anything else that you own digitally, you keep it in a wallet. The wallet has a public key, a public address, and a private key that is only known by you.
This can theoretically remain anonymous because when the ledger is populated, neither the sender nor the recipient names are not in the blockchain. What’s in the blockchain is wallet addresses public keys.
Nevertheless, someone collecting all the transactions might be able to infer the identity of the various owners. The public keys are visible to everybody. Nobody knows who owns each public key unless somebody reveals it, which they would never want to do.
But nobody except for the owner has the private key. The public key is “Here’s my Bitcoin wallet public key and sends the Bitcoin to this address.” But to access the Bitcoin within that wallet, you need a private key. Only the owner has, and if your private key is compromised, you’re screwed because then a hacker or somebody else can gain access to the wallet itself. And it has happened…
To remedy that, there are two types of storage for those wallets:
Hot storage is when the wallet is connected to the internet, allowing transactions to occur live.
Cold storage is when your wallet is disconnected from the internet and held on a local drive, which could take the form of a USB flash drive. That’s very secure except for the idea that heaven forbid you loose the USB flash drive.
What is a cryptocurrency?
A cryptocurrency is a digital currency that can be used to pay for things online. Many people use them simply as an investment, but they can also be used to purchase items online.
There are many different types of cryptocurrencies, including Bitcoin, Litecoin, Monero, Zcash, Dash, Ripple, Dogecoin, NEM, Stellar Lumens and others. They differ in how they operate, what purpose they serve, and how they are used. Some people use them for transactions, while others use them to store value and earn interest.
Bitcoin is the original cryptocurrency and was introduced in 2008. It is one of the oldest forms of cryptocurrency.
The concept behind Bitcoin is very simple. Instead of having a centralized authority issue money, Bitcoin uses cryptography to control the creation and transfer of currency. Cryptography allows individuals to send and receive Bitcoins anonymously without needing to trust each other. This makes Bitcoin ideal for sending money across borders and eliminating third parties such as banks.
However, there are some drawbacks to Bitcoin. For example, because the number of Bitcoins is limited, the supply is fixed and there is no way to increase the amount of coins being produced. Also, since the total number of Bitcoins is finite, prices fluctuate wildly. As of now, there are about 17 million Bitcoins in circulation.
Litecoin was founded in 2011 and is based on open source software developed by Charlie Lee. Like Bitcoin, it eliminates banks as intermediaries and aims to provide fast, cheap global financial transactions.
Ethereum was launched in 2013. Its main goal is to become a decentralized computing platform that runs smart contracts. Smart contracts allow developers to write programs that automatically execute once certain conditions are met.
What are Smart Contracts?
Smart contracts are the foundation to decentralized finance. They should really be called human-less contracts. Smart contracts are automated mechanism by which computers execute transactions with certain conditions have been fulfilled.
If I list my NFT on a market place such as OpenSea, and someone purchases it with Eutherium for the price I listed it, the smart contract will be executed. A bot will instantly send my NFT out of my wallet and I will receive the amount of Ethereum requested. These are contracts executed by computers.
When you have a smart contract, it really allows you to understand that a human being can’t toy around with whether that contract is going to be fulfilled.
Have a question? Contact Olivier Wagner,1040 Abroad.
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