What to know about digital currency, regulation, and investing
By Stephanie Sterling EA, AIF®, ChFC®
By now, almost everyone has heard the word cryptocurrency. But if someone asked you to define words like cryptocurrency, digital wallet, encryption keys, or blockchain, could you?
Cryptocurrency (also called digital currency) is an alternative form of payment that uses an encryption algorithm. A digital wallet on your computer or hand-held device holds encryption keys that confirm your identity, allowing you to gain access to your digital currency. Losing those could mean also losing your cryptocurrency forever.
Cryptocurrencies were first created about 14 years ago, and now many thousands are available. Researching them can be a long process: reading the company’s whitepaper, checking their online presence, and assessing their transparency are good first steps.
Transactions to purchase crypto can be completed by using a broker, or an exchange.
Mining is the process by which people generate new currency and verify transactions. Crypto is initially mined by solving extremely complex mathematical problems using a computer. Although possible, it is hard to mine alone, so most prefer to work in groups that are open to the public called “mining pools.” The mined currency is moved around through transactions recorded in public ledgers, called blockchains.
Digital assets are not currently fully regulated or monitored. The IRS can track transactions you make because cryptocurrency exchanges report transactions to them. Individual tax returns now include the question, “At any time did you (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
The question requires a mandatory response.
Government currencies, known as fiat currencies, are backed by the credit of each country’s government or governing body. The Federal Reserve regulates banks and only monitors currencies held by banks in the USA. Other agencies involved in cryptocurrency include the Securities and Exchange Commission (SEC) and Financial Crimes Enforcement Network (FinCEN).
Cryptocurrencies are a unique asset class that many in the government and financial industry would like to see more widely regulated. The creation of more defined guidelines would help prevent increasing fraudulent activity.
If you’re interested in investing in cryptocurrency, as with any other type of investment, make sure you understand what you are about to purchase, the risks associated with an asset that has no physical presence, scams, and the potential volatility this asset class brings.
If you would like more information on this or other related topics, please feel free to contact Stratos Wealth Partners for a complimentary call or appointment at 928.460.5507. The office is at 100 E. Sheldon Street, Suite 105 in Prescott.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriately qualified professional prior to deciding. Stratos Wealth Partners and LPL Financial do not offer tax or legal advice.
Securities are offered through LPL Financial, Member FINRA/SIPC. Investment Advice is offered through Stratos Wealth Partners, a registered investment advisor and separate entity from LPL Financial.
Cryptocurrency and cryptocurrency-related products can be volatile, are highly speculative, and involve significant risks including liquidity, pricing, regulatory, cybersecurity risk, and loss of principal. A cryptocurrency fund may trade at a significant premium to Net Asset Value (NAV). Cryptocurrencies are not legal tender and are not government-backed. Cryptocurrencies are non-traditional investments, resulting in a different tax treatment than currency. Federal, state, or foreign governments may restrict the use and exchange of cryptocurrency. The use and exchange of cryptocurrency may also be restricted or halted permanently as regulatory developments continue, and regulations are subject to change at any time. Cryptocurrency exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers, malware, or bankruptcy.