Cryptocurrency such as bitcoin might seem exotic, something that only tech wizards, multi-millionaires, underworld spies or cybercriminals engage in.
But it’s more common than you think: There are people in the Henderson area who buy and own cryptocurrency.
And it’s not hard to do: Bitcoin Depot, a company that operates Bitcoin ATMs, has machines at all three Walgreen’s in Henderson as well as Sureway Eastgate that sell bitcoin and dozens of other cryptocurrencies. “Create and verify your account in less than a minute,” the company claims.
Even PayPal — the online payment service once chiefly known as the means for paying for purchases made on eBay — offers an app that allows customers to buy, sell or hold cryptocurrency or to make payments with merchants that accept crypto.
“I was in a meeting two weeks ago and heard inside information on companies called ‘bitcoin miners’ looking to locate to our area,” Mitchell said. Bitcoin miners are data centers that use banks of powerful computers to solve complex mathematical problems to generate new bitcoins or confirm transactions.
But there are misconceptions about cryptocurrency, which in the simplest terms is digital money that is created and exchanged online.
For example:
“You can’t get taxed if you make money on cryptocurrency, right?”
Wrong. Selling cryptocurrency is like selling euros or yen or dollars or a marketable security such as stocks or bonds. Sales of it create taxable income or taxable losses. This is not tax-free income.
As long ago as 2014, the Internal Revenue Service issued Notice 2014-21 to address questions concerning “virtual currency,” declaring at one point, “In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-work economy transaction, has tax consequences that may result in a tax liability.”
Three years ago, a question appeared on tax forms: “Do you own cryptocurrency?” If you make money buying and selling crypto, it’s subject to reporting to the IRS and paying capital gains.
“But cryptocurrency is anonymous and there’s no way to trace it, correct?”
There is a high degree of anonymity in many crypto transactions, but that doesn’t mean that it’s utterly untraceable.
In the spring of 2021, Colonial Pipeline Co. paid $5 million in bitcoin after Russian-based cybercriminals hacked its computer system, shutting down the supply of fuel to much of the Northeastern U.S. But by early June, the Justice Department said it had “found and recaptured the majority” of the bitcoins. The Securities & Exchange Commission has the ability to track cryptocurrency.
“Still, you can make a lot of money with crypto, can’t you?”
Yes, but you can also lose a lot of money, whether because of volatility or criminal behavior — or both.
In the Colonial Pipeline case, the Justice Department recovered 63.7 of the 75 bitcoins that the company paid as ransom — but in the weeks between when the ransom was paid and was mostly recovered, the value of the bitcoins had dropped sharply. Colonial paid out $5 million in bitcoins but recovered only $2.3 million.
The Wall Street Journal reported that from November 2021 to mid-January 2022, the overall crypto market’s value plummeted $1.3 trillion, or 44%. By early October 2022, Bitcoin was trading around $19,000, down from its peak of $69,000 in November 2021, according to Reuters.
There is also fraud in the crypto market. In September 2021, a Los Angeles man pleaded guilty to participating in what the Justice Department called “a massive conspiracy to defraud BitConnect investors in the United States and abroad, in which investors were fraudulently induced to invest over $2 billion.” Prosecutors described it as “a textbook Ponzi scheme” in which earlier BitConnect investors were paid with money raised from later investors.
Do you have concerns or questions about cryptocurrency and your taxes? Contact Mitchell & Associates at 270-827-5828.
