The value of most cryptocurrencies has fallen in recent weeks, wiping out billions of dollars in wealth.
And instead of mostly hurting cryptocurrency enthusiasts, who have previously crashed, the impact was felt broadly.
Cryptocurrencies have seen their popularity skyrocket during the pandemic, and have drawn in countless celebrity recommendations and been integrated into several asset portfolios.
Cryptocurrencies and blockchain-based technologies such as non-fungible tokens (NFTs) are now popping up everywhere, from late-night talk shows to Matt Damon commercials. Athletes like Odell Beckham Jr. and mayors like New York’s Eric Adams (D) have even chosen to have their salaries converted into cryptocurrencies.
While banks and brokers once despised cryptocurrencies, a growing number of them now offer buying and custody services. The barrier has also helped several start-ups, including Robinhood, to re-emerge and has even pressured some blockchain-centric firms to apply for national banking licenses.
This has made the price drop in the last week, where both bitcoin and ethereum plunged over 40 percent from their peaks, all the more damaging.
With the tax filing season underway, many investors are gearing up in the red for massive tax bills on gains they may no longer have.
“One of the main misconceptions about crypto is that people think it̵[ads1]7;s anonymous, so regulators have no way of knowing what you’re doing in the crypto area. But that’s not the reality,” said Shehan Chandrasekera, a certified public accountant and tax strategy manager. at CoinTracker.io, a cryptocurrency compliance software company.
Cryptocurrencies are treated under the same tax rules that apply to stocks, bonds and other investment products. Investors who bought cryptocurrencies with dollars last year do not have to pay tax on these purchases before selling or trading in these coins. Chandrasekera said that investors who bought cryptocurrencies at a higher price than they are currently worth, can even sell these coins now and use the loss as a discount on their 2022 taxes.
However, taxpayers who sold, extracted or exchanged cryptocurrencies in 2021 may have to pay either capital gains tax or income tax for these transactions. Taxpayers who quickly used the cryptocurrencies, reinvested them or lost much of their net worth during the recent crash may have difficulty affording these bills depending on when these transactions took place and the state’s tax rates.
Crushing the total tax burden of cryptocurrency transactions can also be daunting and at times impossible for unknown investors, Chandrasekera said. Most cryptocurrency exchanges do not provide users with annual tax information for their transactions, as stockbrokers or other trading platforms do, he said. The frequency of peer-to-peer cryptocurrency transactions and trading of one currency for another are also unique tax issues for the cryptocurrency sector.
“It’s virtually impossible to reconcile these transactions, especially if you have multiple wallets,” he said, referring to virtual storage systems used to hold cryptocurrencies.
The widespread use of cryptocurrency raises questions about security as an asset going forward, both because of the volatility and the vulnerability to fraud.
The major cryptocurrencies have withstood several sharp exchange rate fluctuations before this week’s collapse.
Bitcoin lost more than half of its value and Ether, the second most traded token, fell more than 25 percent in the first month of 2018.
While both collapses had some external causes – potential regulation in the US and foreign trade disruption – some of the volatility comes down to the nature of the assets.
Unlike traditional currencies such as the dollar or the euro, cryptocurrencies are not widely accepted in exchange for goods or services.
David Sacco, a professor of finance at the University of New Haven, describes them as a “speculative stockpile of wealth” rather than a real currency.
“Crypto is more like digital gold in the first place,” he told The Hill in a telephone interview.
Until there is more widespread use of cryptocurrency applications, be it the purchase of NFTs or the use of blockchain technology for contracts, investors recognize that price fluctuations are likely to remain a feature of cryptocurrency.
“Volatility is going to be there until there is a full adoption with specific utility cases,” said Eloisa Marchesoni, founder of the cryptocurrency consulting firm Def.Ai Inc. “And we do not see it at all yet.”
Supporters of cryptocurrency are quick to point out that general growth trends have been generally positive, but for the waves of investors who have bought during the recent rise, it is unlikely that this fact will provide much consolation.
Smaller coins can be even more volatile. Many of the thousands of tokens that have been launched since bitcoin have increased apparently from nowhere just to bottom out a few days later.
The sources of fluctuations for this type of coin may be even less related to economic realities than the large ones. A single tweet from a prominent figure in the crypto community can increase the value dramatically.
In October last year, the Dogecoin spinoff-shiba inu coin jumped 30 percent after the Tesla boss Elon MuskElon Reeve Musk The Hill’s Morning Report – Democrats feel opportunities with SCOTUS vacancy Musk says “Canadian truck drivers rule” ahead of drivers’ protest over COVID-19 vaccine mandate On The Money – Economy grows after recession in 2021 MORE tweeted a picture of his dog with the text «Floki Frunkpuppy». A few weeks later, he sent the price down 20 percent by revealing that he did not own any SHIB.
Several other so-called shitcoins have had similar jumps without links to material changes. When Rep. Brad ShermanBradley (Brad) James Sherman Frames our future beyond the climate crisis Overnight Defense & National Security – Congress begins Afghanistan barbecue US says around 1,500 people are left in Afghanistan MORE (D-Calif.) Jokingly mentioned hamstercoin during a hearing in December, the value of the tokens doubled and then cratered within a day after investors dumped their assets.
Cryptocurrency has also proven to be a fertile arena for scammers and hackers.
Fraudsters seized a record $ 14 billion in 2021, according to a January report from blockchain firm Chainalysis, which attributed much of the increase in the growing popularity of decentralized financial platforms.
Cryptocurrency scams have flourished on social media. The Federal Trade Commission noted in a release on record numbers of online scams reported last year that “social media is a tool for investment fraudsters, especially those involving counterfeit cryptocurrency investments – an area that has seen a massive increase in reports.”
The site has also been found to be vulnerable to hacks. There were more than 20 hacks last year in which more than $ 10 million in virtual assets were taken, according to NBC News.
Just last week, $ 30 million worth of assets were stolen from digital wallets on the Crypto.com exchange, which recently acquired the naming rights to the Los Angeles Lakers arena.
The company has said that it adopted new security measures in the wake of the hack, but has not shared publicly what they look like.
Proponents of cryptocurrency say potential buyers should follow basic investment rules before jumping in: do thorough research, diversify your holdings and focus on time in the market instead of quick returns.
JW Verret, professor of finance at George Mason University and former senior adviser to the House Financial Services Committee, argued that price fluctuations alone are no reason to crack down on the industry.
“It’s probably easier to support a sector under a beef market. But that does not mean that a bear market requires a regulatory solution, Verret said.
“If someone buys a token just because of a celebrity recommendation alone, it’s a stupid decision, but you can not rule out stupid decisions.”
Nevertheless, Verret said that policy makers and regulators should provide more educational resources to potential investors, establish clear expectations and adjust tax legislation to facilitate the use of cryptocurrencies for transactions.
“The growing retail interest, growing young demographic interest and growing interest across the political spectrum have been exponential, and it is going to have political implications,” he said.
“We are already seeing moderate Democrats who are interested in crypto. I think it will grow, and I think the aggressive anti-crypto voices will be drowned out.”