Exploring the Risks and Rewards of Investing in Cryptocurrencies
Investment in cryptocurrencies has surged in recent years, due to the sudden rise in Bitcoin’s value. Major players in the industry such as PayPal and Xbox have adopted cryptocurrencies, making Bitcoin the most valuable cryptocurrency with a market value in the billions of dollars. The demand for crypto has further increased due to rising investments in venture capital and the increasing popularity of digital assets such as Bitcoin and Litecoin.
However, the IRS has determined that cryptocurrencies are classified as property, so investors will need to pay taxes if they realize a capital gain, and they may be able to deduct reasonable expenses from the income before adding it to the taxable income. Capital gains tax will be applicable when one disposes of this crypto, and if the crypto has been sold for more than it was bought for, then capital gains tax will be applicable on the profit.
The SEC has issued 127 enforcement actions since its first crypto-related enforcement action in 2013, with 30 of those in 2022. Of the 30 crypto-related enforcement actions in 2022, 14 involved initial coin offerings (ICOs), and over half (57%) of these ICO-related actions included a fraud allegation. In 2022, the SEC made history when they brought forth charges for insider trading and market manipulation in the cryptocurrency realm for the first time ever.
Cryptocurrency can be bought and stored through a crypto wallet, and crypto can be transferred between wallets. Crypto can also be purchased with fiat currency, such as GBP. Blockchain technology is the key technology underpinning most cryptocurrencies, non-fungible tokens, and other digital items, and can be used to store all kinds of information.
The recent collapse of the cryptocurrency exchange FTX is a cautionary tale for crypto investors, with the company swiftly losing its $32 billion value in 10 days and filing for bankruptcy. The company’s undisclosed leverage and solvency prompted concern across the cryptocurrency industry and triggered a domino effect on other platforms connected to FTX. A class action lawsuit has since been filed against the company, accusing celebrities who endorsed the platform such as Larry David and Tom Brady of targeting “unsophisticated investors” and causing $11 billion in damages.
The debate on whether cryptocurrencies are useful or useless is ongoing, as they’re usually part of a decentralised network that uses blockchain technology, meaning they’re not under the influence of any central authority.
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