Q. With Bitcoin’s lower price, I finally started investing in it and other cryptos. I heard that tracking transactions can be a nightmare. Is there a way to make this easier?
A. You are right. cryptocurrency traders have struggled to track transactions, depending on the exchange they are using.
But things are getting easier. Just be proactive.
Let’s start with how it all works.
Bitcoin is the most popular type of cryptocurrency which uses a large chain of interconnected computers to store and protect digital assets, Lisa McKnight, certified financial planner at Peapack Private Wealth Management in New Providence.
“Investing in bitcoin may seem complicated, but all you really need to start investing are personal identification documents, bank account information, and a secure internet connection,” she said.
“You will also want to get a bitcoin wallet. This is where your purchased Bitcoin is stored,” she said. “It’s imperative that you practice proper storage and security to ensure your investment doesn’t get hacked.”
You’ll also need to track your cryptocurrency across all wallets, exchanges, and platforms in real time, McKnight said. For this, you can use a crypto wallet tracker app which will allow you to track the total amount and value of your cryptocurrencies, track current and historical transactions and give live cryptocurrency prices, she said. Many apps also have charting and value prediction tools to help users make timely decisions. Most apps are free, but some with more advanced features have annual fees, she said.
Another factor to consider is tracking trades for tax purposes.
“All cryptocurrencies are treated as property for tax purposes; therefore, you may incur capital gains and losses when you buy, sell, trade, or dispose of your crypto,” McKnight said. “Apart from buying, selling, and trading, if you earn cryptocurrency, whether through employment, mining, staking, or interest from lending activities, you are responsible for income taxes on the US dollar value of your crypto earnings.”
She said that calculating your capital gains and losses from your crypto trading activity requires detailed records to track your cost basis, fair market value, and gain or loss whenever you have a crypto. Without this information, you are not able to calculate your realized income from your trading activity, and you are not able to declare it on your taxes.
McKnight said if you’re not qualified to keep these detailed books and records, you’ll want to use crypto tax software so you can accurately report your activities on IRS Form 8949 at tax time.
“As you know, Bitcoin is very volatile and tends to have large and rapid fluctuations in value, which presents an opportunity for large returns but also presents enormous risk,” she said. “It is essential that you learn how to invest in Bitcoin responsibly before making any decisions. Be sure to diversify your investment portfolio to protect yourself from market volatility.
Send your questions to [email protected].
Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. To find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.