cryptocurrency
Crypto
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Not sure if Crypto is taxed, or how to manage it? I can help understand and manage your Crypto needs.
what to know about crypto
How is crypto taxed?
Overall: Ordinary income tax rate
When you sell
short term or long term capital gains rate
Also subject to self-employment or payroll taxes, depending on whether the taxpayer is mining as a trade or business, as an independent contractor or as an employee.
Is crypto mining taxed? Even if it is sitting on a device?
YES at an ordinary income tax rate
What is cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.
A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
what is a blockchain?
A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format.
Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions.
The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
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A blockchain collects information together in groups, known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled.
4 types of blockchains
Public blockchains are permissionless in nature, allow anyone to join, and are completely decentralized. Public blockchains allow all nodes of the blockchain to have equal rights to access the blockchain, create new blocks of data, and validate blocks of data.
Private blockchains, which may also be referred to as managed blockchains, are permissioned blockchains controlled by a single organization. In a private blockchain, the central authority determines who can be a node. The central authority also does not necessarily grant each node with equal rights to perform functions. Private blockchains are only partially decentralized because public access to these blockchains is restricted. Some examples of private blockchains are the business-to-business virtual currency exchange network Ripple and Hyperledger, an umbrella project of open-source blockchain applications.
Consortium blockchains are permissioned blockchains governed by a group of organizations, rather than one entity, as in the case of the private blockchain. Consortium blockchains, therefore, enjoy more decentralization than private blockchains, resulting in higher levels of security.
However, setting up consortiums can be a fraught process as it requires cooperation between a number of organizations, which presents logistical challenges as well as potential antitrust risk. Further, some members of supply chains may not have the needed technology nor the infrastructure to implement blockchain tools, and those that do may decide the upfront costs are too steep a price to pay to digitize their data and connect to other members of the supply chain.
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Hybrid blockchains are blockchains that are controlled by a single organization, but with a level of oversight performed by the public blockchain, which is required to perform certain transaction validations.
proof of work vs. proof of stake
Proof-of-work is a system where computers compete against each other to be the first to solve complex puzzles. This process is commonly referred to as mining because the energy and resources required to complete the puzzle are often considered the digital equivalent to the real-world process of mining precious metals from the earth.
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Works for more simple ledger-based cryptocurrencies but with more complex coins like Ethereum that have a variety of applications including the whole world of DeFi running on top of the blockchain — Proof of Work can cause bottlenecks when there’s too much activity. As a result transaction times can be longer and fees can be higher, therefore, proof of stake works better
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Proof-of-stake is a system in which, validators (the proof-of-stake equivalent of miners) are chosen to find a block based on the number of tokens they hold rather than having an arbitrary competition between miners to determine which node can add a block.
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In this system, the “stake” amount, or quantity of a cryptocurrency a user holds, replaces the work miners do in proof-of-work. This staking structure secures the network because a potential participant must purchase the cryptocurrency and hold it to be chosen to form a block and earn rewards.
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in summary: Proof of work involves solving complex cryptographic mathematical equations using computing power. In contrast, proof of stake miners stake their digital coins for the right to validate new block transactions.
what is mining?
Crypto mining is simply a way of creating new coins. Crypto mining, however, also involves validating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger.
Most importantly, crypto mining prevents the double-spending of digital currency on a distributed network.
how to mine cryptocurrency
Mining cryptocurrencies requires computers with special software specifically designed to solve complicated, cryptographic mathematic equations. In the technology’s early days, cryptocurrencies like Bitcoin could be mined with a simple CPU chip on a home computer. Over the years, however, CPU chips have become impractical for mining most cryptocurrencies due to the increasing difficulty levels.
Today, mining cryptocurrencies requires a specialized GPU or an application-specific integrated circuit (ASIC) miner. In addition, the GPUs in the mining rig must be connected to a reliable internet connection at all times. Each crypto miner is also required to be a member of an online crypto mining pool as well.​
types of mining...
CPU mining: Used early on as the go-to option for most miners. Many now find CPU mining to be too slow and impractical because it takes months to accrue even a small amount of profit given the high electrical and cooling costs and increased difficulty across the board.
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GPU mining: Maximizes computational power by bringing together a set of GPUs under one mining rig.
For GPU mining, a motherboard and cooling system are required.
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asic mining: Specifically designed to mine cryptocurrencies so they produce more cryptocurrency units than GPUs. However, they are expensive, meaning that as mining difficulty increases, they quickly become obsolete.
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cloud mining: This method is the most hands-free way to mine cryptocurrencies. Cloud mining allows individual miners to leverage the power of major corporations and dedicated crypto mining facilities.
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mining pool: Mining pools allow miners to combine their computational resources in order to increase their chances of finding and mining blocks on a blockchain. If a mining pool succeeds, the reward is distributed across the mining pool in proportion to the amount of resources that each miner contributed to the pool.
terms to know
A DEx: (decentralized exchange) is a cryptocurrency exchange that works independently of a central authority of a third party. A user maintains complete control over assets held or exchanged on DEXs. (more secure than CEX)
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CExs:(centralized exchange)
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DEfi:DeFi: decentralized finance
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automated market maker (amm)is a type of decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets. Instead of using an order book like a traditional exchange, assets are priced according to a pricing algorithm
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Different AMM’s use different formulas.
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Uniswap uses x * y = k, where x is the amount of one token in the liquidity pool, and y is the amount of the other. In this formula, k is a fixed constant, .
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p2p: Peer to Peer, on a decentralized exchange trades happen directly between user wallets.
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p2c:: ​​peer-to-contract: trades happen between users and contracts. No order book so no order types on an AMM. Price you get for an asset you want to buy or sell is determined by a formula instead.
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liquidity pool is a collection of funds locked in a smart contract. Liquidity pools are used to facilitate decentralized trading, lending, and many more functions we’ll explore later.
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liquidity providers (lps) add funds to liquidity pools. In return for providing liquidity to the protocol, LPs earn fees from the trades that happen in their pool. In the case of Uniswap, LPs deposit an equivalent value of two tokens.
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staking is a way of earning rewards for holding certain cryptocurrencies. The reason your crypto earns rewards while staked is because the blockchain puts it to work. Cryptocurrencies that allow staking use a “consensus mechanism” called Proof of Stake, which is the way they ensure that all transactions are verified and secured without a bank or payment processor in the middle. Your crypto, if you choose to stake it, becomes part of that process.
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staking pool: which you can think of as being similar to an interest-bearing savings account.
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taxation summary Ultimately, the reward tokens that taxpayers receive in exchange for performing mining activities is taxed as ordinary income upon receipt. The received tokens are also subject to self-employment or payroll taxes depending on whether the taxpayer is mining as a trade or business, independent contractor or as an employee. A taxpayer will trigger another taxable event when he or she ultimately sells the reward tokens which is subject to short-term, or the more preferential long-term capital gain rates depending on the holding period of the tokens.
resources
This firm is legit: Freeman Law
Cryptocurrency and bankruptcy
Crypto and Taxes