In short, a cryptocurrency is a form of digital money.
Cryptocurrency is similar to cash, such as US Dollars ($) or Euro (€), but exclusively digital so there are no physical bills or coins. The first mainstream cryptocurrency, Bitcoin, was created by a pseudonymous person (or persons) called Satoshi Nakamoto in 2008. Since then, thousands of cryptocurrencies have emerged like Ether, Monero, Zcash, and more.
In addition to being completely electronic, cryptocurrency has another unique property compared to all other forms of money: it is not controlled by any central authority. In the Bitcoin whitepaper, Satoshi describes how the decentralized protocol works without requiring any governments, central banks, or financial institutions.
Yes. In most jurisdictions around the world, including in the US, UK, Canada, Australia, and India, the tax authorities tax cryptocurrency transactions.
Most countries, like the US, tax cryptocurrency as property. Therefore if the asset appreciates and you sell/trade/use it for profit, the gains are taxed like capital gains. If the asset depreciates and you sell/trade/use it at a loss, you may be able to deduct the losses against other capital gains to reduce your taxes.
The amount of tax depends on how much capital gain/loss there has been on the asset, how long you have held the asset, and the specific regulations in your country/jurisdiction. Because each taxable event may create a capital gain, you need to know the date, cost basis, sale value, and any fees associated with each transaction.
Generally speaking, these are considered taxable events:
Selling cryptocurrency for fiat currency (i.e. USD, CAD, EUR, JPY, etc.)
With cryptocurrency, the IRS has clarified that like-kind exchanges are not allowed so every cryptocurrency-to-cryptocurrency exchange is a taxable event. Let’s take a look at an example:
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