What is cryptocurrency?
Cryptocurrency is a type of virtual asset protected by cryptography. It typically uses a decentralized network called a blockchain to record and keep a history of transactions. Bitcoin, which debuted in 2008, was the first cryptocurrency and remains the largest and most well-known. In the decade since, Bitcoin and other cryptocurrencies like Ethereum continue to gain prominence.
Cryptocurrency makes it possible to transfer value online without the need for a middleman like a bank or payment processor, allowing value to transfer globally, near-instantly, 24/7.
Cryptocurrencies are usually not issued or controlled by any government or other central authority. They’re managed by peer-to-peer networks of computers running free, open-source software. Generally, anyone who wants to participate is able to.
You can use crypto to buy regular goods and services, although most people invest in cryptocurrencies as they would in other assets, like stocks. When investing in virtual assets, investors may face the risk of losing their entire investment.
What are stablecoins?
Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency like the U.S. Dollar, the price of a commodity such as gold, or other financial instruments. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin, which has made crypto investments less suitable for everyday transactions. Stablecoins pursue price stability by maintaining reserve assets as collateral or through algorithmic formulas that are supposed to control supply.
What is cryptocurrency mining?
Most cryptocurrencies are ‘mined’ via a decentralized network of computers. It’s also the mechanism that updates and secures the network by constantly verifying the public blockchain ledger and adding new transactions. Like physical currencies, when someone spends cryptocurrency, the virtual ledger must be updated by debiting one account and crediting the other. Miners/validators are incentivized to secure the network by participating in the transaction validation process that increases their chances of winning newly minted cryptocurrencies.
Tax implications
You can obtain cryptocurrencies in many ways. You can buy them on an exchange, receive them as payment for goods or services, or virtually “mine” them as mentioned above. Transactions involving cryptocurrencies may have tax implications. Examples include: selling or trading it, giving it as a gift, converting it to fiat currency such as US dollars, or using it to buy goods or services. To ensure correct reporting, you need to keep accurate records of your purchases and sales dealing with cryptocurrency, including records that show how you calculated the fair market value.
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