A handful of today’s readers may be super-advanced Crypto intelligentsia, but for the majority this is not the case. For those striving to understand digital currency, cryptocurrency, blockchain, spending cryptocurrency… and the differences in the meaning of these terms, you have reached the “next level in the crypto journey”.
Although, the present of crypto and blockchain is far ahead of simply understanding these terms. In the interest of advancing knowledge closer to the present, let’s look at a couple of these concepts and the greater crypto and blockchain environment.
At most basic, digital currency refers to any currency that exists online, whereas cryptocurrency refers to currency held as a record on a blockchain database. The distinction is important because it can have significant tax implications.*
- If holding traditional currency in digital form (such as the dollars that we transfer between bank, credit card and investment accounts) the IRS taxes it as money and income.
- If holding cryptocurrency or other purely digital assets, the IRS taxes it as property.*
First question: what is a blockchain database? Or, more simply, what is a blockchain? There are countless ways to Google this question, and one recognizable place to find answers is through the Coinbase website. (PS. Coinbase is an online exchange where cryptocurrencies can be bought, sold and used.) Regarding blockchain, Coinbase’s website says, “At its most basic, a blockchain is a list of transactions that anyone can view and verify. The Bitcoin blockchain, for example, contains a record of every time someone sent or received bitcoin.“** The list of transactions in a blockchain is a basic premise meaning that strangers can make payments with each other without a middleman (like a bank or credit card company or even PayPal) needing to verify, confirm or “clear” a transaction.
A blockchain database stores all the transactions of Bitcoin or the cryptocurrency being tracked.
It is said that advantages of blockchains include:
- Transactions are “published publicly…
- leaving no room for manipulation of transactions changing the money supply, or adjusting the rules mid-game”.**
- Bitcoin is also said to be physically scarce, similar to a precious metal such as gold.
- Transactions are stored permanently on an ever-growing ledger, or distributed ledger.
Ethereum is another, more evolved form of cryptocurrency while also having far more advanced applications as a computing platform… and this is where my head starts spinning (if not already).
In summary:
Part of the reason why this information is worth exploring is that blockchain and cryptocurrency will be a force for making payments in the future. “Possessing” cryptocurrency (such as Bitcoin, Ethereum, Cardano and Ripple) is not simple at the moment but can be done online through an exchange or other online mechanism. There is also such a thing as a “cold wallet” (in the form of a sort of thumb drive) where a person can “possess” crypto without the internet world having access to the wallet.
Investing in Bitcoin or a particular cryptocurrency (to make a gain) may sound like the primary goal, but rather it seems the primary goal – with an increase in value as a secondary goal – is to be able to make payments in the future when the US Dollar may not be the backstop currency of the world. For now, it is fairly certain that there is not anywhere near a strong or consistent enough alternative to the US Dollar. But the next generation is open-minded enough to pursue cryptocurrency and blockchain as payments in their lifetimes.
*Eric Reed, Digital Currency vs. Cryptocurrency – SmartAsset, May 2022.
BUYING CRYPTOCURRENCIES IS EXTREMELY VOLATILE AND RISKY.
CRYPTO EXCHANGES, CRYPTOCURRENCIES AND THE BITCOIN ETF ARE **NOT** FDIC INSURED IN ANY WAY.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.