[Editor’s Note: “7 Explosive Cryptocurrencies to Buy for the Bitcoin Halvening” was originally published in February 2020. It is regularly updated to include the most relevant information.]
The third big bitcoin ‘halvening” is coming in May, and according to our very own Matt McCall — whose Ultimate Crypto portfolio has averaged a jaw-dropping 16% gain in 2020, against a market that’s down 12% year-to-date — that’s a huge reason to be bullish on cryptocurrencies in 2020.
But, before we jump into understanding what that halvening is (also referred to as a “halving”) and which cryptocurrencies to buy for 2020, let’s first understand why cryptocurrencies as a broad asset class have a bright future.
The core purpose of cryptocurrencies is relatively simple: leverage technology to eliminate the middle-man in financial transactions and make buying and selling things less costly and more efficient. Through the blockchain — a decentralized public ledger of transactions that anyone can view, is consistent across the whole network, and is unable to be edited and/or updated unless the whole network agrees with the update — cryptocurrencies are able to conduct and verify financial transactions without needing any central oversight.
That may sound like a mouthful. It’s not. Traditional currencies need big banks to oversee and verify all transactions. Cryptocurrencies do not. This means they’re less costly and more efficient than traditional currencies, because there’s no middle-man to pay and no paperwork to fill out.
Sure, there are risks to cryptocurrencies achieving mainstream adoption and overtaking government-backed currencies. But, lower transaction costs and quicker transactions are large enough value props to warrant there being a bright future for cryptocurrencies (even if they don’t take over the world).
Now, let’s take a deeper look at why cryptocurrencies will rise in 2020.
Two key characteristics of bitcoin are limited supply and constrained supply growth.
There are a fixed number of bitcoins in the world (21 million). The bitcoin world started with most of those bitcoins being “locked in the system”. Each time an individual updated bitcoin’s ledger (also called “mining”), the individual would unlock new bitcoins. But to constrain supply growth and retain incentives for mining, the bitcoin system is set up so that every so often, the amount of new bitcoins unlocked for mining a block is halved.
So far, bitcoin has undergone two halvings. After the first halvening in 2012, bitcoin prices rose about 8,000% over the following 12 months. After the second halvening in 2016, bitcoin prices rose about 2,000% over the following 18 months. In both instances, many alternative cryptocurrencies actually rose far more than bitcoin.
In other words, bitcoin halvings have traditionally been exceptionally bullish catalysts for cryptocurrencies. And that makes complete sense. Prices are determined by supply and demand. If supply growth slows, and demand growth doesn’t, then prices should go up.
The third bitcoin halvening is coming in May 2020.
The number of bitcoins unlocked for mining one block will fall from 12.5 bitcoins, to 6.25 bitcoins. Because of this halving, bitcoin’s supply is expected to rise by just 2.5% in 2020 — an all-time low for the cryptocurrency. It’s expected to rise by less than 2% in 2021.
Concurrently, demand growth should accelerate in 2020, driven by the introduction of more financial derivative products, broader support from central banks and increasing recognition of bitcoin as a digital store of value.
Bigger demand growth plus lower supply growth equals higher cryptocurrency prices. That’s largely why Matt McCall, who has already picked one 70%-plus altcoin winner this year, thinks that the best of the big 2020 cryptocurrency rally is still ahead of us.
With all that in mind, I suggest readers keep a close eye on these seven explosive cryptocurrencies in the coming year:
- Bitcoin (BTC)
- Zcash (ZEC)
- Ripple (XEC)
- Basic Attention Token (BAT)
- Chainlink (LINK)
- Synthetix Network Token (SNX)
- DxChain Token (DX)
Of course, the most obvious cryptocurrency to buy for 2020 is bitcoin. Over the next few months, bitcoin will be a direct beneficiary of slowing supply growth and accelerating demand growth across the cryptocurrency world.
On the supply side, the third halving in May will directly impact the amount of new bitcoins coming into market, and will lead to relatively slow supply growth.
Meanwhile, on the demand side, cryptocurrency interest will soar in 2020 as the third halving draws media coverage and public attention. Bitcoin demand will move higher simply because this is the “gateway” into cryptocurrencies for new investors. That is, as new investors enter the cryptocurrency market over the next few quarters, most of them will likely start by getting their feet wet with bitcoin.
Accelerating demand growth plus constrained supply growth will lead to higher prices for bitcoin in 2020.
Privacy is a top priority in the cryptocurrency community, and privacy-focused coins will likely win big in 2020. That’s why McCall has picked top privacy coin Zcash as one of his top altcoin investments for 2020.
Zcash, which is one of McCall’s favorite altcoins in his Ultimate Crypto portfolio, is a pure play on the growing importance of privacy in cryptocurrency.
That is, the first wave of cryptocurrencies was all about decentralization …
“Existing currency valuation models do not quite take into consideration decentralization — a potentially distinguishing feature of cryptocurrencies,” says Professor William Cong of Cornell University.
Now that cryptocurrencies have gained more mainstream traction and are starting to exhibit staying power, it’s time for another distinguishing feature to emerge — privacy. Privacy is one of the more important and discussed characteristics in both the crypto world and the financial transaction world at large.
As the importance of privacy grows in the crypto world, privacy coins will outperform, and Zcash looks particularly primed to outperform given the company’s recent pivot into private mobile transactions.
A leading altcoin positioned for potentially big gains in 2020 is Ripple.
Ripple is a company which leverages blockchain technology to enable banks, payment providers, digital asset exchanges and corporations to send money globally, usually using the company’s cryptocurrency, XRP.
In many ways, then, Ripple is the infrastructure behind cross-border cryptocurrency payments.
As cryptos gain more mainstream traction, Ripple is adding more and more banks and various other customers to its network. Most recently, the National Bank of Egypt just partnered with Ripple.
More and more banks will partner with Ripple in 2020 as cryptocurrency awareness and demand rises. As it does, the price of XRP will rise, too.
One of the more interesting cryptocurrencies to watch in 2020 — and which could explode higher — is Basic Attention Token.
The core idea behind BAT is pretty simple. The digital advertising model is broken, in that user and advertiser incentives are not aligned. Instead, they run opposite one another. That is, advertisers want users to watch their ads, while consumers want to skip the ads.
The idea of BAT is to realign the incentive structure in the digital ad network so that user and advertiser incentives match one another.
To do this, users get paid Basic Attention Tokens to watch ads in the Brave browser, so that they are now financially incentivized to watch the ad. The end goal, of course, is that more consumers watch ads, and advertisers sell more product/generate more brand awareness.
It’s a pretty smart business model.
And, as cryptocurrencies gain more mainstream consumer traction in 2020, this smart model for compensating users to watch ads should similarly gain traction. As it does, the price of BAT should rise.
One of the hottest cryptocurrencies, and one which Matt McCall thinks will remain red hot for the foreseeable future, is Chainlink.
In his Ultimate Crypto portfolio, Matt first recommended Chainlink in early January at a price of $2.09. Today, Chainlink trades hands at $3.66, up a whopping 75% in just four months. What’s more, that 75% return over the past four months, follows a 450% return in 2019.
In other words, Chainlink has been scorching hot. Strengthening fundamentals imply that it will remain hot for the foreseeable future.
Specifically, Chainlink leverages blockchain technology to create smart contracts, which are essentially self-executing contracts that can be executed without central oversight.
But businesses have been slow to adopt smart contracts because data is integral to executing these smart contracts, and there hasn’t yet been a reliable way to connect external data with the smart contract.
That’s exactly what Chainlink does. So, they provide a very necessary gateway to usher in broader adoption of smart contracts. This adoption uptake in 2020 will provide a natural tailwind for LINK, and the coin’s red-hot rally will likely persist.
The Synthetix Network Token is a cool platform in the ethereum ecosystem which leverages blockchain technology to help bridge the gap between the often very obscure cryptocurrency world, and the far more tangible traditional asset world.
That is, in the Synthetix Network, there are Synths, which are synthetic assets that provide exposure to assets such as gold, bitcoin, U.S. Dollars and various equities like Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL). The whole idea of these synthetic assets is to create shared assets wherein users benefit from asset exposure, without actually owning the asset.
It’s a very unique idea, and a promising project in the ethereum landscape. Because it helps bridge the gap between cryptocurrencies and traditional assets, it creates a level of familiarity and value that are often missing in other cryptocurrency assets. This familiarity and value ultimately position SNX price to rise in 2020.
On the smaller side, a cryptocurrency which look like an interesting speculative buy in 2020 is DxChain Token.
DxChain is a very ambitious project which aims to use blockchain technology to solve the world’s data computation, storage and privacy issues. It’s a tall order. But, if it works, it could yield huge results in terms of DXC usage and value growth.
In 2020, data privacy concerns are front and center. As such, privacy-focused coins should rise. DXC is one of the more interesting privacy-focused coins with potentially huge long term upside.
While it’s still all very speculative, those attributes may make this altcoin worth the risk over the next few quarters.
In the bigger picture, it’s not an understatement to say that the opportunity in cryptocurrency in 2020 is a once-in-a-lifetime event.
New technologies are often undergirded by periods of rapid, exponential growth … before either dying out in supernova fashion or normalizing to meet realistic expectations. So when cryptos had their first “once-in-a-lifetime” event in 2013 — which turned every $1,000 into $93,000 — the spectating world thought they had missed out.
Then came the next life-changing event in 2017, turning every $5,000 into $123,000 … that was assuredly the big boom that you either rode to 25x gains or, well, you didn’t, right? Wrong.
Cryptocurrencies are unlike any trend we’ve ever seen before, and there will be another opportunity for investors to turn a fistful of dollars into millions of dollars.
The key to this explosion is the Halvening. Don’t miss out this time!
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
Author: By Luke Lango, InvestorPlace Markets Analyst
Cryptocurrencies are property capable of being held on trust, New Zealand High Court holds
In Ruscoe v Cryptopia Ltd (in Liquidation)  NZHC 728 the New Zealand High Court held that cryptocurrencies, as digital assets, are a form of property that are capable of being held on trust.
The decision is important:
- as one of only a few currently in the common law world to address expressly the question, in a fully reasoned judgment, as to whether digital assets such as cryptocurrencies constitute property and can be the subject of a trust; and
- because it also addresses the difference between “pure information”, on the one hand, and “digital assets”, on the other, in terms of characterisation as property (this is an issue of significance in areas going beyond the realm of cryptocurrencies and Distributed Ledger Technology – for example, in relation to ownership of machine-generated data created by Artificial Intelligence and the Internet of Things).
This briefing outlines the Court’s findings on these issues before considering the wider implications of the judgment.
Cryptopia was a cryptocurrency exchange that enabled account holders to trade pairs of cryptocurrencies among themselves. It maintained a database listing the account holders and their digital assets held on the exchange (in the form of digital “wallets” or accounts). Cryptopia charged fees for trades, deposits, and withdrawals made by account holders.
The account holdings within digital wallets were protected by encryption, with Cryptopia exclusively holding the private keys to the digital wallets (account holders did not have access to the private keys). Despite such protection, in 2019 Cryptopia’s servers were hacked and approximately NZ$30 million of cryptocurrency from account holder wallets was stolen, using the private keys.
Cryptopia’s shareholders placed the company into liquidation and the liquidators applied to the Court for guidance on two questions relating to the categorisation and distribution of assets in the liquidation:
- Is cryptocurrency “property” for the purposes of section 2 of New Zealand’s Companies Act 1993, capable of forming the subject matter of a trust?
- Was the cryptocurrency in fact held on trust by Cryptopia for the account holders?
Essentially the dispute was a contest between the account holders and the unsecured creditors (and potentially the shareholders) as to whom was entitled to distribution of the remaining assets of the business.
The account holders argued that cryptocurrencies must be seen as a form of intangible personal property both at common law and within the definition in section 2 of New Zealand’s Companies Act 1993 (the relevant statutory provision in terms of the pool of assets available for distribution on liquidation).
Section 2 of New Zealand’s Companies Act 1993 defines “property” as:
“[P]roperty of every kind whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise.”
The Court held that all of the various cryptocurrencies at issue were “property” within the definition in section 2 of New Zealand’s Companies Act 1993 “and also probably more generally” (i.e. at common law).
This briefing does not consider the Court’s reasoning in relation to the Companies Act definition of property, but focuses on the reasons the Court gave for its conclusion on the position at common law. Specifically, in reaching such conclusion, the Court relied on Lord Wilberforce’s opinion in the House of Lords in the English case of National Provincial Bank Ltd v Ainsworth  AC 1175 (HL) at 1247–1248, where he said:
“Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.”
The Court in Ruscoe was “satisfied the criteria for Lord Wilberforce’s definition of ‘property’ were clearly met in this case.” This was because:
- Identifiable subject-matter: the Court considered that this requirement was met because “computer-readable strings of characters recorded on networks of computers established for the purpose of recording those strings … are sufficiently distinct to be capable of then being allocated uniquely to an account holder on that particular network. For the cryptocurrencies involved here, the allocation is made by what is called a public key – the data allocated to one public key will not be confused with another. This is the case even though the identical data is held on every computer attached to the network”;
- Identifiable by third parties: the Court was also “satisfied here that cryptoassets clearly meet this criterion. On this aspect, it has long been recognised by property lawyers that the power of an owner to exclude others from an asset provides a more important indicator of ownership than the power actively to use or benefit from that asset.” On the facts of the current case, “the degree of control necessary for ownership (namely the power to exclude others) is achieved for cryptocurrencies by the computer software allocating to each public key a second set of data made available only to the holder of the account (the private key), and requiring the combination of the two sets of data in order to record a transfer of the cryptocurrency attached to the public key from one account to another”;
- Capable of assumption by third parties: the Court held that this criterion was met too – cryptocurrencies had the two characteristics of property relevant to this criterion. That is, that property is: (1) “by its nature to be concerned with legal rights that affect strangers to bilateral transactions”; and (2) “normally, but not always, an asset recognised by the law as an item of property will be something which is potentially desirable to third parties such that they would want themselves to obtain ownership of it”; and
- Some degree of permanence or stability: the Court held that this criterion was also satisfied. Referring to the fact that, on a blockchain, a cryptocurrency is transferred by the digital destruction of an existing asset in the hands of the transferor and by the creation of a new one in the hands of the transferee, the Court noted that there “will be situations where the short life of an asset is the result of the deliberate process of transferring the value inherent in the asset so that one asset becomes replaced by another. [C]ryptocurrencies work in this manner but it is also true that bank payments use a similar process which is simply native to the type of property in question. This is not inimical to the asset’s status as property.”
The Court was therefore satisfied that cryptocurrencies met the standard criteria outlined by Lord Wilberforce so as to be considered a species of “property”:
“They are a type of intangible property as a result of the combination of three interdependent features. They obtain their definition as a result of the public key recording the unit of currency. The control and stability necessary to ownership and for creating a market in the coins are provided by the other two features – the private key attached to the corresponding public key and the generation of a fresh private key upon a transfer of the relevant coin.”
The liquidators in Ruscoe had argued that information is not generally recognised as a form of “property” and cryptocurrencies might be said to be a form of information. Referring to English authorities on the point,1 such argument – the Court explained – was based on the view that neither the common law nor equity recognised property in “information”, and cryptocurrencies are said to be merely digitally recorded information.
The Court took the view that, whether or not this was the definitive position at common law, cryptocurrencies were not, in any event, pure information:
- the Court noted that “the whole purpose behind cryptocurrencies is to create an item of tradeable value not simply to record or to impart in confidence knowledge or information”; and
- pure information can be infinitely duplicated. This, the Court said, was not true of cryptocurrencies, “where every public key recording the data constituting the coin is unique on the system where it is recorded. It is also protected by the associated private key from being transferred without consent.”
Moreover, referring to a number of New Zealand authorities dealing with computer data and electronic information,2 the Court said that the New Zealand courts “have accepted that the orthodox position that information is not ‘property’ does not attach to cases involving digital assets. [D]igital files were seen as ‘property’ by distinguishing them from ‘pure information’.”
While it is still too early to say so definitively, it is possible that, in having to consider: (1) where new technologies lie within the orthodox legal categorisations of property; and (2) the reality that electronic data has enormous value in commercial dealings, courts in the common law world may increasingly feel compelled to begin to draw distinctions such as those made in Ruscoe. There a distinction was drawn between digital files / digital assets (property) and pure information (not property). Perhaps we may soon see that kind of judicial pragmatism in other jurisdictions too.
For example, the English Court of Appeal in Fairstar Heavy Transport NV v Adkins & Anor  EWCA Civ 886 said as early as 2013 that it “would be unwise … for this court to endorse the proposition that there can never be property in information without knowing more about the nature of the information in dispute and the circumstances in which a property right was being asserted. Some kinds of information, such as non-patentable know-how, are more akin to property in their specificity and exclusivity than, say, personal information about private life.”3
Having found that the cryptocurrencies were property, it followed, the Court in Ruscoe said, that they are capable of forming the subject matter of a trust.
Did such a trust in favour of account holders arise on the facts? The Court held that the three elements required to give rise to a trust were met:
- Certainty of subject matter: This element was satisfied because the subject matter of the various trusts (being the cryptocurrencies) was clearly recorded in Cryptopia’s database.
- Certainty of objects: The Court found that there was no uncertainty as to whom the beneficiaries of the relevant trusts were. They were those account holders with positive balances for the respective currencies in Cryptopia’s database.
- Certainty of intention: An intention of the settlor to create a trust had been established, the Court found, because Cryptopia had manifested its intent through its conduct in creating the exchange without allocating to account holders public and private keys for the digital assets it commenced to hold for them. The database that Cryptopia created showed that the company was a custodian and trustee of the digital assets.
The account holders in Ruscoe had argued that any finding by the Court that cryptocurrencies were not property would have unsatisfactory implications for the law, including in particular insolvency law, succession law, the law of restitution, and commercial law more generally.
Property is the foundation of many transactions. In the absence of legislation, under common law cryptocurrencies cannot become the subject matter of a trust or a proprietary right of security unless they are recognised as property. “The same is true of a secured creditor or trust beneficiary enforcing their claim in property to the unsecured creditors of an insolvent coin-holder. The development of a viable cryptocurrencies derivative market may sometimes require that the primary assets from which secondary claims are constructed are capable of legal recognition as property.”4
Similarly, the UK Jurisdiction Taskforce’s Legal Statement on Cryptoassets and Smart Contracts5 (cited with approval in Ruscoe) observed that “it is important to understand whether the many statutory and common law rules applicable to property apply also to crypto-assets and, if so, how. Of particular significance are the rules concerning succession on death, the vesting of property on personal bankruptcy, the rights of liquidators in corporate insolvency, and tracing in cases of fraud, theft or breach of trust. It would, to say the least, be highly unsatisfactory if rules of that kind had no application to crypto-assets.”
Perhaps influenced by such policy considerations, we may soon see more common law decisions following the kind of reasoning in Ruscoe in relation to cryptocurrencies and property, and maybe even in relation to other kinds of digital assets more broadly. Whether other jurisdictions take a similar path to this decision remains to be seen. The Court of Appeal of Singapore – the nation’s highest court – has expressly not decided whether cryptocurrencies are a type of property, and in England and Wales there is High Court authority to say that cryptocurrencies are property.6
Of more significance, longer term though, is the distinction made in the case between pure information and digital files/digital assets in the light of the ascendancy of the importance of data in the commercial arena.
The protection of data has long been problematic for commerce and industry. Intellectual property rights provide very limited protection for machine-generated data, such as that produced from Artificial Intelligence and the Internet of Things (with limited scope for copyright and database rights, and reliance typically having to be placed on the weaker rights of confidentiality/trade secrets law or contractual rights). The possibility that some forms of data may constitute property could have profound implications for the protection and commercialisation of commercial and industrial data.
The IRS Wants to Know About Your Cryptocurrency Transactions
Cryptocurrencies, such as Bitcoin, Litecoin, Ethereum, and Ripple, make the U.S. Internal Revenue Service (IRS) nervous. They want to know what you’re up to so that they can tax it, and due to COVID-19, you must file your 2019 income tax by July 15, 2020.
On their new Schedule 1 form, the IRS has thrown in a new question: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
RELATED: IS NASA DEVELOPING ITS OWN CRYPTOCURRENCY?
Unless you have a death wish, or don’t mind doing hard time, you’ve got to include your cryptocurrency dealings on your income tax filing. We’re going to tell you how to do it, but first, a disclaimer.
We’re not tax professionals, so take the facts provided below as informational only. Also, those living in countries other than the U.S. may have very different income reporting obligations.
The IRS identifies cryptocurrencies as property, just like collectible coins, valuable paintings, vintage cars, or stocks. Property can appreciate or depreciate in value.
You must report all cryptocurrency transactions and all cryptocurrency, or digital currency income even if you didn’t receive a tax form from a cryptocurrency exchange.
While some exchanges, such as the popular site Coinbase, provide a transaction history to every customer, they only provide an IRS Form 1099-K to those customers whose transactions meet a certain dollar amount.
According to the IRS website, “A Form 1099-K includes the gross amount of all reportable payment transactions, and you will receive a Form 1099-K from each payment settlement entity from which you received payments in settlement of reportable payment transactions.”
The IRS requires you to report your gains and losses on each of your cryptocurrency transactions. You report cryptocurrency transactions at their fair market value in U.S. dollars.
To calculate your gains and losses, you’ll need the cost basis of each transaction, that is, the amount you spent in dollars to buy the cryptocurrency and the amount in dollars that it was worth when you sold it. You can use losses to offset capital gains, thus making losses deductible.
You must pay taxes on cryptocurrency if you:
- Sell crypto for cash, this can result in a gain or a loss
- Use crypto to pay for goods and services
- Use one cryptocurrency to buy another cryptocurrency, such as using Bitcoin to buy Ethereum
- Receive mined cryptocurrency
- Are paid by an employer in cryptocurrency; it is considered compensation and taxed according to your income tax bracket
- Are an independent contractor who is paid in cryptocurrency
- Are a cryptocurrency miner, you must report the fair market value of the currency as of the day of receipt
- Received cryptocurrency as a reward.
You don’t have to pay taxes on cryptocurrency if you:
- Purchase crypto with cash and hold it
- Transfer crypto between wallets; it’s a good idea to confirm transfers with your exchange
- Donate crypto to a qualified tax-exempt charity or non-profit organization, such as a 501 (C)(3); you can claim a charitable deduction equal to the fair market value of the donation
- Receive crypto as a gift and don’t sell it; you can give up to $15,000 per recipient per year without having to pay taxes on it, but if the amount exceeds $15,000, you must file a gift tax return.
Section 501(c)(3) is the portion of the U.S. Internal Revenue Code that allows for federal tax exemption of nonprofit organizations, specifically those that are considered public charities, private foundations or private operating foundations.
On its website, the IRS states that “Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.”
An airdrop is a usually free distribution of a cryptocurrency token or coin to numerous wallet addresses. Airdrops are done to help newer cryptocurrencies gain attention and new followers.
Recipients are either selected randomly or the airdrop is publicized on bulletin boards or in newsletters. Some airdrops require joining a group, retweeting a tweet, or inviting new users.
Airdropped cryptocurrency should generally be taxable as ordinary income, and valued at its fair market value on the date of receipt. If your exchange doesn’t yet support the new coin, meaning it can’t be sold, then it isn’t taxable.
A fork is an upgrade to a blockchain network. Permanent forks are used to add new features to a blockchain, to reverse the effect of hacking, or to fix bugs, as was the case with the Bitcoin fork that occurred on August 6, 2010, or the fork that separated Ethereum and Ethereum Classic.
Crypto that is received in a fork becomes taxable when it can be transferred, sold, or exchanged. The IRS discusses forks on its Frequently Asked Questions on Virtual Currency Transactions webpage.
Things get even more complicated if you bought cryptocurrency at different times, then sold only a portion of it. You need to choose the cost based on FIFO (First-in-First Out), LIFO (Last-in-Last Out), or the Specific Identification method, which identifies exactly which coins were sold. This IRS page provides information on this choice.
If there is one thing the IRS has a lot of, it’s forms. Some of those you may need to use to report cryptocurrency on your income tax include:
- Form 8949 – use if you have transactions that qualify as a capital gain or a loss; you can use the transaction reports provided by your exchange
- Form 1040 (Schedule D, Capital Gains and Losses) – this is a summary of your capital gains and losses
- Form 1099-K (Payment Card and Third Party Network Transaction) – this is the form that must be filled out if you have more than $20,000 in gross proceeds and more than 200 transactions in a calendar year.
If you followed the last link provided, you land on an IRS page with the word “Attention” in red, which is never a good sign. It’s followed by several paragraphs, the first of which states: “Copy A of this form is provided for informational purposes only. Copy A appears in red, similar to the official IRS form. The official printed version of Copy A of this IRS form is scannable, but the online version of it, printed from this website, is not. Do not print and file copy A downloaded from this website; a penalty may be imposed for filing with the IRS information return forms that can’t be scanned. See part O in the current General Instructions for Certain Information Returns, available at www.irs.gov/form1099, for more information about penalties.”
If you understood this last paragraph, please let me know so I can put you up for a MacArthur Genius Grant. In the meantime, in July 2019, the IRS sent out over 10,000 letters telling recipients that they owed back taxes, interest, and penalties on their cryptocurrency transactions and that they needed to file amended returns. The IRS also lets recipients of the letters know that they could possibly face criminal prosecution and fines of up to $250,000.
In case you think dabbling in cryptocurrency sounds too complicated, consider this: on March 20, 2020, the value of Bitcoin rose 23% in just 24 hours, reaching $6,172.61.
Author: Marcia Wendorf