Bitcoin is a virtual currency that is not backed by the full faith and credit of an issuing government, unlike the dollar, the euro or the yuan are. It is obtained by using complex software to solve a complicated mathematical computation, a process known as mining. The reward for solving the equation is the release of new Bitcoins into circulation. But, the total supply is limited to 21 million; therefore, as more Bitcoin are mined, the difficulty of mining increases. The exchange of Bitcoin is tracked using blockchain—a decentralized network that serves as a public ledger, a permanent record that can be verified by the entire community using the blockchain.
Let’s talk about bitcoin from an asset standpoint: It’s not a stock. Some argue over whether it is a currency. Regardless of your thoughts, Bitcoin and other cryptocurrencies are making headlines on every financial news outlet. As long-term investors holding primarily Large-Cap publicly traded stocks, why do we care about Bitcoin? Simply, because people are spending so much money in buying it. From the beginning of 2017 through Dec. 18, 2017, bitcoin was up about 1,700%. Since then, it has lost nearly 60% of its value.
Most folks talk about Bitcoin as if it is a true investment. Yes, Bitcoin can be held and eventually sold at a higher price. However, Bitcoin is billed as a digital currency, trading much like gold, the euro or yuan. The caveat is that it is difficult to understand what drives the value of this cryptocurrency. Unless you are willing to bet against the dollar, the euro or the yuan, why would you want to get into Bitcoin? You can’t currently take a bitcoin to the grocery store to buy food nor can you pay your taxes with Bitcoin.
In our opinion, until the government accepts it as a currency, it’s not a currency. It is an asset that stores value. As such, we view Bitcoin and all cryptocurrencies as a speculative bet carrying significant risk. Generally, you still have to exchange your Bitcoin for dollars to realize any gain you’ve made. While you can find merchants willing to accept Bitcoin, prices are often translated into dollars in order to complete a transaction.
Contrary to the rumors, there is no tax loophole for Bitcoin. Just because you aren’t issued a 1099 on your gains doesn’t mean you don’t owe tax. The IRS considers Bitcoin as property for tax purposes. Gains from the sale or exchange of Bitcoins could trigger a tax liability assessed at ordinary income or capital gains rates depending on the duration of the holding period. Mined Bitcoins could be taxed as ordinary income, and possibly subject to self-employment tax. Furthermore, many of the companies that facilitate the transactions of Bitcoin and other cryptocurrencies are issuing 1099-Ks for their biggest customers.
Overall, virtual currencies face a lot of challenges, despite the financial industry’s acceptance of blockchain technology. Regulatory oversight is lacking, and its lure of complete anonymity unfortunately makes cryptocurrency the ideal platform for money laundering activities and illegal drug transactions.
We do not recommend Bitcoin as an investment. However, if you are insistent on participating in the cryptocurrency craze, we would recommend diversifying among several of the digital currencies as only time will tell which one may prevail, if any. If you have questions regarding Bitcoin, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
