Is Crypto in a bear market?
Cryptocurrencies are likely in a bear market, but it may be a short one. According to Coindesk's latest (June) quarterly review, we are more than 76 days into a bear market (defined as a drop of at least 20%, followed by at least 90 days in which the price does not return to its previous high or low). Moneyweb.co.zaBitcoin's bear market could be a short one
15 July, 2021 - 09:05am
If you've held on to your Bitcoin since then, you've obviously learned how to increase your net worth and now have a sizable unrealized capital gain in your portfolio. But what happens if you choose to convert this erstwhile investment into an actual currency used to buy goods and services?
You're going to feel a tax pinch. But do you know how much you'll owe Uncle Sam? To answer that question, you need to understand what cryptocurrency is and how your tax liability is determined every time you buy it, sell it, or mine it.
Cryptocurrency is a type of virtual currency that uses blockchain cryptography to secure transactions. It also has no central bank overseeing the supply of currency available in the market.
Unlike centralized electronic money or traditional paper money systems, called fiat currencies, cryptocurrencies rely on distributed digital ledgers to secure and verify transactions. (Well-known fiat currencies include dollars or euros.)
This blockchain technology anonymously logs all transactions ever recorded and acts like a continuously-updated checkbook universally accessible by all.
There are many different types of cryptocurrency, but Bitcoin is the best-known, closely followed by coins including Ethereum and even Dogecoin.
There are also ways to receive cryptocurrency beyond simply buying it on an exchange. For example, some cryptocurrencies use "mining" as a process to solve complicated equations to record data on the blockchain. To incentivize miners to participate, they may receive payment in new crypto tokens. You can also receive cryptocurrency through a marketing promotion on an exchange or through an "airdrop."
Many people are quick to point out how cryptocurrency is not backed by any government and, thus, subject to less regulation than fiat currencies like the dollar or euro. This lack of oversight has led many to believe that cryptocurrency investors are participating in elusive and anonymous transactions that allowed them to avoid paying taxes. However, this belief is absolutely false. In the United States, crypto exchanges must report user activity on gains and losses to the Internal Revenue Service (IRS), and cryptocurrency is taxed in much the same way as traditional stocks or similar assets.
Cryptocurrency is considered "property" for federal income tax purposes, meaning the IRS treats it as a capital asset. This means the crypto taxes you pay are the same as the taxes you might owe when realizing a gain or loss on the sale or exchange of a capital asset.
For instance, when you purchase a capital asset – be it a stock, bond, exchange-traded fund, house, Bitcoin, or any other investment – you initiate a basis equal to your cost to acquire it. When it comes time to sell your capital asset, you simply compare your net sales proceeds to your original basis to determine whether you have a capital loss or a capital gain. If the proceeds exceed your original cost basis, you realize a capital gain. When reversed, you've locked in a capital loss.
When you buy and sell cryptocurrency, comparing your net proceeds to your cost basis isn't the only step in figuring how much you owe in crypto taxes. You also need to consider the length of time you held the asset, as this determines the type of capital gain or loss you recognize. Depending on how long you hold your cryptocurrency, your gains or losses will be considered "short-term" or "long-term." That distinction will play a big role in how much you have to pay in crypto taxes.
Short-Term Capital Gains and Losses. When you buy and sell an asset within a 365-day period, you recognize either a short-term capital gain if it sold for more than what you paid for it or a short-term capital loss if it sold for less than what you paid for it. Short-term gains and losses are subject to the same tax rates you pay on ordinary income, such as wages, salaries, commissions, and other earned income. The IRS has seven tax brackets for ordinary income ranging from 10% to 37% in 2021.
Long-Term Capital Gains and Losses. If you buy an asset and sell it after one year, the resulting difference between your net sales proceeds and your cost basis is a long-term capital gain or loss. Typically, you'll pay less tax on a long-term gain than on a short-term gain because the rates are generally lower. Currently, there are three tax rates for long-term capital gains – 0%, 15%, and 20%. The rate you pay depends on your income.
You can also offset capital gains with capital losses. However, the offset must first apply to gains and losses of the same type. For example, short-term losses first lower your short-term gains, while long-term losses reduce your long-term gains. Any remaining net losses can be used to offset the other kind of capital gain (e.g., remaining short-term losses can offset remaining long-term capital gains). If you still have any capital losses available, they can be used to offset up to $3,000 of ordinary income. After that, any remaining capital loss is rolled over to the following year.
There are other ways to obtain virtual currency beyond simply buying it. For instance, you can earn cryptocurrency by mining it. You can also receive it as a promotion for goods or services, for free from cryptocurrency platforms, or for staking cryptocurrency. This latter activity allows you to earn interest by purchasing and setting aside your tokens to become an active validating node for a crypto network. In these situations, you owe tax on the entire value of the crypto on the day received and it counts as ordinary income.
A complicating factor for crypto investors arises when they attempt to use their virtual currency to pay for goods and services. The IRS chose to treat cryptocurrency as property in 2014 because most people only saw it as a capital asset at the time. Now, as more companies choose to accept cryptocurrency as a form of payment and people begin to adopt it as a unit of account, many people have begun to see it as a viable alternative currency. However, the current tax treatment of crypto impedes the wholesale replacement of fiat currency.
With traditional fiat currencies, you simply pay for your purchase and have no tax consequences related to cost basis or the value of your currency at the time of payment. However, cryptocurrency users must deal with capital gains and losses in addition to whatever sales taxes they might face at the point of sale.
For example, let's imagine you bought $10 worth of Bitcoin two years ago and it has since appreciated to $100 in value. If you sold it on an exchange, you'd have $90 of realized long-term capital gains, just like you would with any other capital asset.
If you instead used that same $100 worth of Bitcoin to buy groceries from the supermarket, you'd still have to pay long-term capital gains taxes on the $90 difference between appreciated value and your cost basis.
As you can imagine, tracking your capital gains and losses for everyday transactions like this can become tedious and a downright impediment to replacing fiat currency altogether.
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15 July, 2021 - 09:05am
China’s share of global electricity usage for bitcoin mining fell to under half for the first time this April, while Kazakhstan has catapulted to third place as its share of mining increased sixfold.
China’s global hashrate, the computational power required to mine new bitcoins, fell from over 75 per cent to 46 per cent of the global total between September 2019 and April 2021, according to data from the Cambridge Centre for Alternative Finance. The following month, Beijing stepped up its crackdown on the energy-intensive industry, which it has been trying to curtail for close to a decade.
The data also provide the first clear look at Chinese crypto miners’ seasonal migration from Xinjiang in the west, which relies primarily on coal-powered plants, to southern regions of the country to take advantage of cheap hydroelectric power during the wet season.
The expulsion of miners from China makes it harder to track electricity usage, however, as many new mining operations involve private deals with off-grid power stations.
“I think [that growth] makes things even more complicated than they used to be,” said Michel Rauchs, digital asset lead at the CCAF. “The [mining] could go anywhere, there’s no way of tracking it unless you’re communicating at the source.”
“It’s important to know that bitcoin miners are highly incentivised to develop and use the most economical and efficient energy,” said Perianne Boring, founder and president of the Chamber of Digital Commerce, a blockchain and cryptocurrency advocacy group.
But in places such as Kazakhstan, the growing crypto mining industry relies primarily on fossil fuels, which generated close to 90 per cent of the country’s electricity last year, according to the US Department of Commerce.
“We see that extra demand [for electricity] is met by extending the lifetime of old power plants or completely reinstating plants which were decommissioned because they were not profitable any more,” said Rauchs.
In the US, the second-largest mining country, with 16.8 per cent of the global hashrate, some mining relies on fossil fuels. In upstate New York, private equity company Greenidge Generation Holdings converted a coal plant to natural gas in 2017 in order to mine bitcoin, pledging to use carbon credits to offset its activities.
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15 July, 2021 - 09:05am
Another one, and another one, and another one bite the dust
The official motivations behind this crackdown are two-fold. The first is China's hope to be carbon neutral within five years, and shutting down cryptocurrency mining operations is a quick way to reduce energy usage, at least in the short term. (Although switching to clean sources of power could help achieve the same result.)
The second motivation is financial: The People's Bank of China said in June that cryptocurrencies "disrupt the normal economic and financial order, breed the risk of illegal and criminal activities such as illegal cross-border asset transfer and money laundering, and seriously infringe on the property safety of the people."
Regardless of the reasoning, the reality is that China has been actively shutting down cryptocurrency mining operations over the last few months. Inner Mongolia was among the first regions to crack down on mining, then it was joined by the Qinghai and Xinjiang provinces, and the Sichuan province followed shortly after.
Bitcoin's hash rate, which is essentially the amount of computing power being used to mine the cryptocurrency, also plummeted from 180.66 million terahashes per second (THps) on May 13 to 84.79 million THps on July 2. It could take the network a year to reach that same hash rate without the contributions of China-based miners.
Now, even more cryptocurrency mining operations are being shut down throughout China. At this rate, it seems like it's only a matter of time until all of the country's provinces follow the seven regions in shutting down any of the miners they find.
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