Almost half way into 2018, several factors have contributed to a decline in bitcoin prices, and the future of cryptocurrencies is still very much in flux. Here are some recent developments in the value, regulation and taxation of digital currencies that investors need to know now.
Last fall we wrote about investors’ increasing interest in bitcoin and other cryptocurrencies. Our prediction of continued uncertainty in digital currency exchanges was an apt one. Over the past six months, several factors have contributed to a decline in bitcoin prices, and the future of cryptocurrencies is still very much in flux. Here are some recent developments in the value, regulation, and taxation of digital currencies that investors need to know now.
Bitcoin has had a rocky 2018 so far. While typically prone to dramatic fluctuations, the digital currency experienced its second-worst quarter ever in Q1 2018 and has done little since.
Some market analysts believe that this may be a result of cryptocurrencies’ increasing correlation to stock markets with traders basing their decisions on the performance of their entire asset portfolios. Overall market volatility could be contributing to fluctuations in cryptocurrency values.
Despite bitcoin’s recent decline, the price remains lofty, and investors who have owned the currency since May of 2017 have seen its value increase nearly 330% percent.
Adoption and opposition
Losses in the first quarter may also be connected to regulatory fears. Governments in countries including the U.S., South Korea and China were reportedly considering tightening regulations or potentially even banning cryptocurrencies. However, these threats appear to have been overstated, and bitcoin futures began to recover in April. Even if regulations are enacted, there’s a possibility it may be a net positive for cryptocurrencies, increasing the public’s confidence and leading to a boost in adoption rates.
Another recent development that hurt the values of bitcoin and other cryptocurrencies was the announcement of new advertising bans. Major technology platforms, including Google, Facebook, Instagram and Twitter, will no longer host ads for cryptocurrencies or initial coin offerings (ICOs), claiming that the advertisers’ practices were misleading. In addition to hampering the marketing of digital currencies, these announcements damaged the public’s perceptions of the exchanges.
Digital currency traders are also concerned that exchanges are vulnerable to cybertheft. A successful breach in January cost a Japanese exchange $500 million in bitcoin, and an Italian exchange had $170 million of a digital currency called Nano stolen in February.
While cryptocurrencies aren’t currently regulated in the U.S., earnings from trading digital currencies are taxable as property. In March, the IRS warned taxpayers that any income from cryptocurrency transactions must be included on their tax returns.
Properly filing can be complicated for digital currency traders because no official reporting mechanism exists and different taxes may apply based on how an individual conducted their transactions. Some traders receive a 1099 form from their exchanges, but those who do not have to track their gains and losses independently. Gains from cryptocurrencies are taxed on a cost basis, which means that filers need to know the initial value of the currency to accurately report their income. Truthful reporting is important as failing to do so could result in a fine of up to $250,000 or even a prison sentence.
Current traders or prospective investors should be mindful that cryptocurrencies such as bitcoin are very volatile assets. It is difficult to predict how they may be impacted by changes in market conditions, regulations or public opinion in the coming months.
Digital currencies should be treated like other speculative investments. Investors need to carefully evaluate the pros and cons and be mindful of the overall percentage of their portfolios allocated to high-risk assets. 2018 has been a tumultuous period for digital currency traders thus far, and this instability is likely to continue for the foreseeable future.
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