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With the current level of dramatic fluctuations in the cryptocurrency market, it’s never been more necessary to understand the various nuances that come with investing in this market. On one hand, there are traders, and on the other, there are investors. Although many people mistakenly believe that their goals are the same, they are not.
In other words, unlike many other long-forgotten trends in the past, crypto isn’t going away anytime soon. To be fair, they’ve earned their reputation, and have their edges. However, in the same spirit of justice, cryptocurrencies have drawbacks. As an investor, you cannot bear to disregard the inherent volatility of cryptocurrency.
Before concluding if cryptocurrency is a good investment for you, there are five things that you must know about cryptocurrency, involving how it is taxed and how you can use a crypto tax calculator to estimate your taxes for the upcoming year. Let’s dive right in!
Basics of Investing in Crypto
You may not like the transition from banknotes to digital currency, but that doesn’t mean it won’t happen. Although we don’t yet know how a cashless future would appear, there’s no doubt that removing the tangible part of the money from the equation allows for speedier and more economical trade.
But the question is: how can you start investing in cryptocurrency?
Buying a cryptocurrency with fiat currency, like US dollars on a well-known exchange like Binance, Coinbase, or FTX is the simplest way to get along the wind of change in crypto investing. A couple of payment applications, such as Cash App, PayPal, and also Venmo allows you to buy and trade cryptocurrencies. However, when compared to crypto exchanges, their features are limited and their fees are higher.
Here’s how you can invest in cryptocurrencies:
- Create an account on any of the above-mentioned platforms.
- Now you’ll need to fill out your personal and financial information, and an identification as well.
- After your account is set up, you can easily transfer money from your linked bank account.
That’s all!
Investment Allocation of Crypto
Investments, be they stocks or crypto, are dependent on your risk appetite.
To determine if a certain asset is suitable for your portfolio, years of earnings outcomes are required to establish a historical analysis. Since cryptocurrency is still so nascent, there isn’t enough information to establish what part of your investment portfolio should be crypto.
However, on average you can allot 3% of your portfolio to crypto.
Risks in the Crypto Market
Bitcoins are one of the most erratic investment alternatives available, and unpredictability is one of the most fundamental indications of an asset’s financial health.
One of the most appealing features of many digital currencies is that it may also be a source of danger for individual investors. Cryptocurrencies are decentralized by definition, which means they don’t have a physical existence and aren’t supported by a single authority.
Nonetheless, there is still light at the end of the tunnel!
Contrary to the buzz, frauds, and hazards associated with this industry, there are indicators that the crypto market is calming down in terms of volatility. Most cryptocurrencies have lately seen large trading and financial organizations purchase considerable shares. Because of the stabilizing impact of these huge corporations, those cryptos may begin to demonstrate healthy volatility.
Taxability of Crypto
In the United States, cryptocurrency is subject to taxation. Cryptocurrency is classified as property, by the Notice 2014-21, issued by the Internal Revenue Services, and transactions involving it are taxed under the law in the same way that transactions involving other assets are.
Purchasing cryptocurrency is not a taxable transaction in and of itself. Even if the value rises, you may acquire and retain Bitcoin tax-free. A taxable event, such as the sale of a cryptocurrency, must occur first. When you transfer, exchange, or dispose of bitcoin in any way and realize a profit, you must pay taxes on that profit.
Non-Taxable Events
- Purchase crypto with fiat currency
- Gift cryptocurrency to friends and family
- Donate crypto to a tax-exempted charitable organization
- Swapping crypto between crypto wallets
Taxable Events
- Exchange of digital currency (a cryptocurrency like Bitcoin, Ethereum, etc.) for fiat currency (US Dollar, Euro, etc.)
- Exchange of one crypto for another crypto
- Using crypto for buying goods and services
- Mining crypto or crypto hard fork
But how can you estimate your crypto taxes? With the ZenLedger crypto tax calculator, you can determine what your cryptocurrency’s cost basis was when it was bought and traded, and then pick the optimal alternative based on your bitcoin tax rate. This task would be hard to do without a crypto tax calculator.
Learn about Crypto
You might’ve tried to break into the crypto world, but perhaps the jargon-y words in almost every other sentence. So how can you learn about crypto?
You can take the help of books on cryptocurrency and blockchain, such as The Bitcoin Standard, crypto learn and earn programs by Coinbase, Koinly, or Binance, and also Reddit (r/CryptoCurrency).
The Bottom Line
One of the most difficult things for investors to avoid when it comes to digital currencies is getting caught up in the moment. Experts continue to warn investors about cryptocurrency’s volatility and inconsistency. If you’ve chosen to invest in the crypto market, you should do your homework first, just like you would with any other investment.
FAQ About Investing in Cryptocurrency
Cryptocurrency is a digital payment mechanism that does not rely on banks for transaction verification. Many cryptocurrencies are built on blockchain technology, which is a distributed ledger verified by a global network of computers. It’s a peer-to-peer technique that enables anybody to make and receive money from anywhere.
Bitcoins are one of the most erratic investment alternatives available, and unpredictability is one of the most fundamental indications of an asset’s financial health.
To determine if a certain asset is suitable for your portfolio, years of earnings outcomes are required to establish a historical analysis. Since cryptocurrency is still so nascent, there isn’t enough information to establish what part of your investment portfolio should be crypto.
In the United States, cryptocurrency is subject to taxation. Cryptocurrency is classified as property, by the Notice 2014-21, issued by the Internal Revenue Services. With the ZenLedger crypto tax calculator, you can determine what your cryptocurrency’s cost basis was when it was bought and traded, and then pick the optimal alternative based on your bitcoin tax rate. This task would be hard to do without a crypto tax calculator.