In the past ten years, cryptocurrency — also referred to as ‘digital currency’ — has quickly risen up the ranks to become a globally respected virtual currency. The cryptocurrency market continues to grow exponentially, showing no signs of slowing down just yet. Transactions are quick, digital, secure, and worldwide, which means record keeping is done without the risk of data being pirated. Nowadays crypto can be used to pay for goods or services, to invest in, or even exchange funds with someone else. So how then does tax cryptocurrency work? In this ultimate guide, we walk you through the mechanics of tax cryptocurrency and how to stay on top of your finances as a US tax-paying citizen.
What is cryptocurrency?
Cryptocurrency is a digital currency. You can’t see it or touch it, but it’s there. While cryptocurrency units are named ‘coins’, they’re not a physical coin. You keep crypto coins in a digital wallet or use an exchange or brokerage. While various cryptocurrencies exist, the two most popular ones are Bitcoin and Ether.
Instead of using a bank to create, transfer, and exchange funds, crypto uses an encrypted blockchain network to process transactions. The best part about crypto is that no bank or government controls it like with traditional currencies. Rather, crypto works through blockchain — it’s practically a digital database (distributed public ledger) — and is run through cryptography.
What makes cryptocurrency like Bitcoin so secure is that it’s digitally confirmed by a process known as ‘mining’. What this means is, all the information that enters the Bitcoin blockchain is mathematically checked using a complex digital code set up on the network. That blockchain network will confirm and verify all new entries into the ledger, as well as alterations.