Cryptocurrencies have seen their popularity skyrocket during the pandemic, pulling in countless celebrity endorsements and being integrated into more asset portfolios. And instead of mostly harming cryptocurrency enthusiasts, like previous crashes have, the impact was felt widely.
While banks and brokers once scorned cryptocurrencies, a growing number of them now offer purchasing and custody services. The boom has also helped propel several start-ups, including Robinhood, to new prominence and has even pushed some blockchain-centric firms to seek national banking licenses.
Cryptocurrency and blockchain based tech like nonfungible tokens (NFTs) are now showing up everywhere from late-night talk shows to Matt Damon commercials. Athletes like Odell Beckham Jr. and mayors like New York’s Eric Adams (D) have even chosen to have their salary converted into cryptocurrency.
That has made the price drops of the last week, where both bitcoin and ethereum plunged over 40 percent from their highs, all the more damaging.
With tax filing season underway, many investors in the red are bracing for massive tax bills on winnings they may no longer have.
“One of the main misconceptions of crypto is that people think that it’s anonymous, so, therefore, regulators have no way of knowing what you’re doing in the crypto space. But that’s not reality,” said Shehan Chandrasekera, a certified public accountant and head of tax strategy at CoinTracker.io, a cryptocurrency tax compliance software company.
Cryptocurrencies are treated under the same tax rules applied to stocks, bonds and other investment products. Investors who bought cryptocurrencies with dollars last year will not need to pay taxes on those purchases until they sell or trade those coins. Chandrasekera said investors who bought cryptocurrencies at a higher price than they are currently worth can even sell those coins now and apply the loss as a rebate on their 2022 taxes.
Crunching the total tax burden of cryptocurrency transactions can also be daunting and at times impossible for unfamiliar investors, Chandrasekera said. Most cryptocurrency exchanges do not provide users annual tax filing information for their transactions as stock brokers or other trading platforms do, he said. The frequency of peer-to-peer cryptocurrency transactions and trades of one coin for another are also unique tax issues for the cryptocurrency sector.
But taxpayers who sold, mined, or exchanged cryptocurrencies in 2021 may need to pay either capital gains taxes or income taxes for those transactions. Taxpayers who quickly spent their crypto profits, reinvested them, or lost much of their net wealth during the recent crash may have trouble affording those bills depending when those transactions took place and state tax rates.
“It’s virtually impossible to reconcile these transactions, especially if you have multiple wallets,” he said, referring to virtual storage systems used to hold cryptocurrencies.
The widespread adoption of cryptocurrency raises questions about its safety as an asset moving forward, both because of its volatility and vulnerability to fraud.
The major cryptocurrencies have endured several precipitous price swings before this week’s collapse.
Bitcoin lost over half of its value and Ether, the second most traded token, dropped more than 25 percent in the first month of 2018.
While both collapses had some external causes — potential regulation in the U.S. and foreign crackdowns on trading — some of the volatility comes down to the nature of the assets.
Unlike traditional currencies like the dollar or euro, cryptocurrencies are not broadly accepted in exchange for goods or services.
“Crypto is more like digital gold basically,” he told The Hill in a phone interview.
University of New Haven finance professor David Sacco describes them as a “speculative store of wealth” rather than a true currency.
“Volatility is going to be there until there’s a full adoption with concrete use cases,” said Eloisa Marchesoni, founder of the crypto consultancy firm Def.Ai Inc. “And we’re not seeing that yet at all.”
Until there is more widespread adoption of cryptocurrency applications, be that purchasing NFTs or using blockchain technology for contracts, investors acknowledge price swings are likely to remain a feature of cryptocurrency.
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