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No, I won’t grow my list of cryptos in my table to shill your favorite coins. Though if a cryptocurrency I haven’t mentioned is truly innovative, tell me about it. I might add it to the table.
A friend or acquaintance may have talked up cryptocurrencies and recommended you view this page to learn more about them. Welcome. This is the place for you. Much has been said about cryptocurrencies on the news and Internet. This page will take you from 0 to familiar. It will not make you an expert, but you’ll know the lingo, the motivation, and whether you’re interested in learning more.
You may have heard of Bitcoin or Ethereum. These are just two of thousands of cryptocurrencies, but they happen to be extremely popular. Bitcoin in particular has the honor of being the first cryptocurrency.
Cryptocurrency, or crypto for short, is the term used for digital money. But not just any digital money. In fact, the money in your bank account is more digital than real, in the sense that the total money supply in the U.S. far exceeds the amount in circulation on paper. But crypto is something special.
First, let’s talk about fiat
The money you tend to keep in your wallet, or in your bank account, is called fiat, which essentially means it is the standard currency that is controlled by the government. In the United States the fiat currency is called the Dollar (USD), while in Mexico the fiat currency is the Peso (MXN). Fiat is often called ‘cash’, but cash often hints at fiat in its physical form, so the term fiat is preferred when referring to conventional money, contrasted with crypto.
Fiat is not crypto, even when fiat is represented digitally. When in digital form, fiat is transferred between financial institutions via a proprietary, regulated protocol that only authorized people and machines can participate in.
Sending fiat between two private parties is cumbersome, to say the least. Transferring fiat between parties requires the sender to have adequate cash in the right denominations and to physically hand this to the receiving party. Carrying cash around is inherently risky due to loss or theft. In our economy, most people are not paid in cash, so carrying cash around might mean frequent trips to the bank to withdraw funds.
Receiving fiat is also a risky activity. Fiat may be counterfeit when in physical/cash form, so the receiving party takes a risk when exchanging goods and services for cash, especially when the value being exchanged is high. Assuming it is genuine, the receiver then has to safely hold the cash until they can deposit it with a financial institution.
To make this more convenient and reduce risk in transactions, financial institutions can facilitate an electronic transmission of your fiat. This financial institution may be your bank, PayPal, Venmo, or many others. But these financial institutions don’t often interact well with others. For example, a PayPal user cannot send money to a Venmo user. Until recently, a Bank of America customer could not send money to a Wells Fargo customer, although recent collaborations across banks like Zelle has made this possible.
Most financial transactions happen with a credit or debit card that your bank issues to you. This makes online and in-person payments to merchants convenient, and offers certain protections both to the consumer and the merchant. The consumer is often assured that identity or card theft will not cause a loss of money from the user’s account. The merchant is assured that the payment they receive will not be counterfeit.
But these protections and conveniences come at a cost. The merchant pays a fee for every purchase, which can be 1-4% in common cases, and even more for small purchases. If an item costs $1, the consumer pays $1 (plus tax), and the merchant may only get $0.90 of that. The merchant also bears the risk that the card was stolen, because if after the purchase, the owner of the card claims the charge was made without authorization, the merchant never gets paid, or the money they already received gets ‘charged back’ by the consumer’s bank.
Want to buy something particularly expensive, like a car, a boat, or a house? The seller may not accept credit cards at all, either because the card fees would be too high or because the seller is not a business at all but just another person like you. And even if the seller does accept cards, your card’s spending limit may preclude such a purchase. In such cases, a check is quite often used. Checks are typically fee-free, but they don’t offer any assurance to the seller because they can bounce. Cashier’s check or money orders offer greater protection to the seller as they are guaranteed by a trusted intermediary to not bounce, but that puts fees and inconvenience on the buyer.
I did not even mention cash as an option for large purchases for a few reasons. No buyer wants to risk carrying that much cash around, nor would the seller after the transaction. In the U.S., withdrawing $10,000 or more requires your bank to report your transaction to the government. Then there is the suspicion that folks that deal in large quantities of cash are guilty of illicit activities.
All this leads us to the economy we live in where it is rare, and very often impossible, to exchange money between two private parties without involving one or often two 3rd parties (the banks).
I should also mention that the supply of any particular fiat tends to be controlled by its sponsoring government. In the United States, “the Fed” controls the money supply. They add or remove USD from the economy in an attempt to control the inflation rate. Inflation isn’t all bad, it turns out. A small, consistent % of inflation can help create a market incentive for folks with large amounts of money to invest it rather than hide it under their mattress where its buying power would only degrade.
But the government that controls the money supply can also hyperinflate its own currency. When a government runs out of money, they can just print more. But as this does not create any real value in the economy, it effectively steals value from everyone already holding that currency. It is a regressive tax. The more money the government prints, the less any of it is worth. Hyperinflation happens when a government prints so much money that it loses value almost faster than you can spend it. In some countries, hyperinflation drives people to buy bread as fast as they can after they get paid, lest what they were paid won’t be enough to buy bread later in the day.
Where Bitcoin comes in
When we talk about cryptocurrencies, we’re talking about a whole new way of creating, exchanging, and storing money.
Digital money was historically a tough scientific problem due to the ease in counterfeiting. Where printing your own fiat currency such that it would fool someone else into believing it is genuine, copying digital money might be as easy as copying a file. The only way to prevent counterfeiting historically has been for everyone to trust one centralized entity to track who has money and record each transfer between parties.
Bitcoin was innovative in that it was the first form of digital money that didn’t rely on a centralize, trusted entity. It not only solved the technical challenges of counterfeit protection, but provided the incentive structure for a distributed, decentralized network of machines (called ‘nodes’) to serve the same function that a centralized entity would, but in a trustless way.
When we say “trustless” or zero-trust, we don’t mean a thing is untrustworthy, but rather that the trust is placed in the protocol rather than the individual. We may not know any of the people who operate the machines that make Bitcoin work, but we don’t have to in order to trust system. The system defines a process for managing money such that an evil actor cannot steal, lose or mishandle your money. To be clear, crypto can be stolen or extorted from you, but Bitcoin established rules that put security for your money squarely on your shoulders, while allowing you to exchange money with others, over untrusted networks, without fear of loss.
I won’t go into the technical details of Bitcoins innovation here, but if you hear people talk about blockchains, they’re talking about Bitcoin’s innovation that allows the secure storage and transfer of money on a trustless, decentralized network.
As a part of its decentralized ethos, Bitcoin was designed to not trust any humans at all. This includes the money supply. Bitcoin was designed to gradually create 21 million BTC (the token of bitcoin) over the course of many years, and never more than that. As a result, BTC has a controlled inflation rate in the (relative) short term, and assuming people continue to use it, it will effectively become a deflationary currency as more people use it, demand for it grows, yet its supply is fixed (or shrinks as people lose it — more on that later). Theoretically, nothing can change this supply cap of 21M BTC and still call it Bitcoin.
I mentioned earlier that a small amount of inflation is a good thing for economies. Bitcoin then isn’t optimally designed with this in mind. But if digital counterfeiting was a hard problem that took decades for Bitcoin to solve, setting an inflation rate for a decentralized, digital currency is even harder. Explaining why is beyond the scope of this beginner’s article. But let’s just say that the seller’s pitch for Bitcoin might include that whatever value to society is lost by Bitcoin’s deflationary nature is made up for by its promise to never hyperinflate its currency. You can take it at its word or doubt it, but that’s the call Bitcoin made.
Perhaps the most exciting thing Bitcoin enables for everyday users is that we can now hold and transmit arbitrarily large amounts of money without the assistance of a 3rd party, and without fear of having it all stolen in a mugging.
This is all software, and Bitcoin’s code can be changed. And it has been many times. And it turns out this is very important to understand when you’re learning about cryptocurrencies. Let’s dig in.
Bitcoin was introduced to the world as open-source software. This means everyone can read it to see how it works. It also means anyone can change it, or create their own software based on what they learned from reading how Bitcoin works. But if someone changes Bitcoin, it isn’t “Bitcoin” anymore. For example, if someone changed the 21M BTC supply cap in the Bitcoin source code, all the original Bitcoin nodes would reject the change, forcing the changed source code to only succeed if it called itself by some other name.
Changing the supply cap is just one of many things about Bitcoin that people have been interested in changing. Many people have changed Bitcoin’s source code and created their own cryptocurrency. Such cryptocurrencies are called ‘forks’ of Bitcoin, and they come in many varieties. Other cryptocurrencies have since been created that were inspired by Bitcoin’s innovative blockchain but were otherwise written from scratch.
Many people categories all the cryptocurrencies into two groups: Bitcoin, and the altcoins. That serves to elevate Bitcoin to a perception that it is the one true cryptocurrency while all the rest are just wannabees. But this may not be a fair characterization, because as it turns out, some of these altcoins are quite innovative in their own right.
Bitcoin was innovative in its day, and its high price reflects its ‘first mover advantage’ and market recognition. But it really is something of a dinosaur by the standards set by many of the newer cryptocurrencies. Let’s enumerate some of Bitcoin’s shortcomings:
- Little or no privacy. Despite what Bitcoin originally claimed, it’s terrible in this area. Every account balance and every payment is in the open for all eyes to see. If you paid your babysitter with Bitcoin, they could trivially look to how much Bitcoin you own, who else you’ve sent BTC to or received it from, how often, the value of your BTC paycheck, etc. That’s perhaps worse than any currency preceding it.
- Slow clearing times. The nature of the blockchain is that until a transaction is in the blockchain, it isn’t to be trusted. For BTC, a ‘block’ is added to the blockchain about every 10 minutes. Wanna pay for your groceries with BTC? Be prepared to stand there for up to 10 minutes while the clerk waits to verify your BTC payment. Wanna buy a bike from a stranger on Craigslist? Can you imagine standing on their driveway awkwardly for 10 minutes while they wait for your payment to clear? Me neither.
- High fees. Each transaction costs BTC to send. This ‘network fee’ is analogous to the fees the merchant would pay for taking your credit card, except in blockchains it’s the sender that pays the fee instead of the receiver. And the fee isn’t proportional to the amount being sent as it is with credit cards. The fees started out being trivially small (far less than a penny), but as Bitcoin became popular, getting your transaction into the blockchain is something of a bidding war, and transaction fees during high traffic times can be as high as $15 USD or even more. Not a good way to pay for everyday items.
- Bitcoin is limited to about 7 transactions per second worldwide. Compare this to Visa, which regularly processes 1,700 transactions per second.
- Bitcoin’s immutable, trustless nature precludes chargebacks. Even a sovereign power like the U.S. government cannot reverse a charge to refund BTC. All they can do is intimidate a defendant in a courtroom to try to get them to send funds back. This makes Bitcoin great for the receiver in a transaction, because they are guaranteed to have been irrevocably paid. But in the real world where you may exchange BTC for goods, it isn’t great and creates even more need for a 3rd party like an escrow company for large purchases. Some consider no possibility of chargebacks to be a win, by the way, and for a merchant it no doubt is. But for the consumer, it’s a loss.
How Altcoins may (or may not) improve on Bitcoin
Some altcoins propose solutions to one or more of these problems. Other altcoins add absolutely no innovation and therefore are theoretically worthless.
Here are several altcoins you may have heard of that innovate (or not) to solve some of Bitcoin’s failings:
|Cryptocurrency||Privacy||Clearing times||Fees / scale||Chargebacks|
|Ethereum (ETH)||No improvement||Improved||No improvement||Smart contracts|
|Litecoin (LTC)||Some improvement||Improved||No improvement||No improvement|
|Zcash (ZEC)||Totally private, optional||Improved||No improvement||No improvement|
|Nano (XNO)||No improvement||Instant||Zero fees, infinite scale||No improvement|
|Dogecoin (DOGE)||No improvement||No improvement||No improvement||No improvement|
You may notice that Dogecoin is not innovative in any way. In fact, I’d say it is anti-innovative because instead of reigning in inflation, it inflates its own currency to an unbounded degree. There is no supply cap, so everyone who holds Dogecoin holds something that is going down in value from moment to moment unless enough Greater Fools buy into it constantly to offset this inflation. I do not recommend Dogecoin. I merely mention it as an example of just one of many cryptocurrencies that are not innovative.
Litecoin is the next least innovative. Its main claim to fame is the faster clearing times (a very simple change to bitcoin source code) and lower fees that will only remain low while its blockchain growth rate can outpace its own popularity. Recently they made some changes to improve privacy, but I’m not too familiar with its details, and am fairly confident it is not nearly as private as some of the other altcoins that are known to be ‘privacy coins’ by being great at concealing everything about the account balances and transfers that people make.
Ethereum is truly remarkable due to its pioneering of smart contracts. These are little computer programs that can serve as a trustless escrow service, among other things limited mostly by our imagination. Sites like kickstarter may take a chunk out of each donation, but ETH could provide a decentralized solution that holds donations till the minimum required amount is reached, and automatically refund donors if it isn’t. But these contracts cost ETH to execute, and fees have been very high even for regular transactions as a result. Some of these smart contracts have had bugs that have led to remote theft of ETH as well.
Nano radically re-imagined the blockchain in order to make every transfer instant, and fee-less. Nano’s proponents claim that its architecture means that theoretically Nano could scale to support the world’s transactions, although real-world testing suggests they are far from realizing this goal.
Zcash pioneered the use of zero-knowledge proofs, a radically new area of cryptography, in order to totally conceal everything in a transaction while preserving the desirable traits of cryptocurrencies such as counterfeit-proofing. If you pay someone in Zcash, you’ve disclosed even less information to the person you’re paying than if you had paid them with cash. Although Zcash hasn’t solved the fee/scale problem, its fees at present are very low, and they are actively working on advance cryptography techniques that may provide a solution to the scale problem which would be instrumental in keeping fees low.
While every shortcoming in the above table has been partially or wholly solved by some altcoin, sadly no single cryptocurrency has solved all the shortcomings. If a cryptocurrency could solve them all at once, I would probably bet on it over all the others. Maybe someday someone will figure out how to solve all the problems at once. But in lieu of that, my personal favorites are Zcash for its privacy features and Nano for its instant and no-cost transfers.
It’s worth taking a few minutes to understand why people advocate for crypto. There are a variety of reasons, and each person may weigh these reasons differently.
- No 3rd party needs to be trusted to hold your money, keep your financial details private, or be involved in a transaction between two private parties.
- No risk of hyperinflation from a runaway government.
- Truly transcend national boundaries. Crypto can be sent around the world in minutes or instantly, beyond the control of sovereign nations.
- Invulnerable to any financial institution going out of business or losing your money due to bad investments they use your money to fund.
- Censorship resistance. Governments have a much harder time seizing money or blocking its transmission when it is cryptocurrency. Lately we’ve seen governments intimidate large players to effectively freeze some cryptocurrency accounts, but the ‘privacy coin’ varieties of invulnerable to such actions.
Fundamental crypto limitations
Bitcoin and other cryptocurrencies all have their limitations. Some can be overcome, but there are some things that are pretty fundamental to how crypto works and thus is not likely to be overcome. These include:
- Spending crypto requires a computer or smartphone.
- Spending crypto requires an Internet connection. And while you obviously have one, dear reader, you may not when you’re at your family reunion at a cabin in the mountains and trying to split the food bill.
- Confirming receipt of crypto requires an Internet connected device as well. Note that this is confirming receipt, as receiving crypto doesn’t require you to have any device at all.
Getting started with crypto
Now that you know the history and basic theory of crypto, how do you actually get some, hold it, or spend it?
First we need to talk about how you hold crypto. There are two options for this.
Cryptocurrency is held at an “address” that is similar to a bank account number, or your Venmo username. This address is what others need to know in order to send you crypto.
Crypto at this address can only be spent with a ‘private key’ counterpart to that address. This is crucial to understand: if you lose the private key, no one will be able to help you recover access to your crypto. This is very unlike any other conventional bank account, where if you forget your password you can call customer service to regain access to your account. Or suppose a loved one dies and you inherit their crypto: no one can help you gain access to it if you do not have the private key.
An address looks like a bunch of random characters and numbers thrown together. For example one of my BTC receiving addresses is
3DcDL4er2jqkGZwzur1Dw91gLyKviTGUtb. Yes, that’s case sensitive, and no you’re not expected to memorize it. Why is it crazy long and random? Because it is quite literally the result of a cryptographic operation, the public key in a private/public key pair. Why doesn’t someone make a friendly name you can use instead? Some have. But as that isn’t part of the decentralized protocol, it means you’d be giving up the trustless, decentralized nature of crypto by using a friendly handle. So nearly everyone just uses their raw addresses.
It’s very important to get this address exactly right. When passing this address around, one wrong character or capitalization, and the crypto sent to that address will not be yours. It will just be blasted into oblivion, never to be recovered. For this reason, you should generally not hand-enter this address. You should use copy/paste to pass the address to someone else. And because malware on your device may see a crypto-address on your clipboard between the copy and paste and even change it, you should always at least spot check the address you pasted to make sure it matches where you copied it from. Some malware even replaces your address with another that looks similar to yours (though not exactly) so that in spot-checking you think it’s correct though it isn’t. So be careful, run a virus checker regularly, and don’t download strange software.
A very common way of sharing your address across devices (e.g. so one party can send crypto to another party) is via QR code. Most wallets can display a QR code with your address so another wallet can scan it with a camera.
A crypto wallet is a software application that you can install on your computer or phone that will keep your addresses and private keys for you. They provide the functionality required to send crypto to others, review your transactions, and expose your address for sharing with others to send crypto to you.
Software wallets keep your private keys on your computer, and thus are vulnerable to malware that may steal your private key and send it to others, who can then use it to spend your crypto. This is another important point: anyone with your private key can spend all crypto you have or ever will have in the future at that address. If you believe your private key may have been stolen, you should immediately establish a new address with a fresh private key and transfer your crypto to that address.
Most wallets create all private keys based on a single secret called a seed phrase, which is commonly 12 or 24 words that appear random but as an ordered sequence, they unlock all the crypto in your wallet, no matter which address in that wallet it is stored in. You should back up your seed phrase in a location secure from theft, fire, or any other hazard. You should probably tell a trusted family member where you keep the seed phrase so in the event of your untimely death, your loved ones can recover your crypto.
Software wallets require ‘sync time’ when you open them. Since the blockchain grows all the time, your wallet needs to download the latest transactions to see which ones impact your account. The time it takes to sync varies by cryptocurrency, wallet software, and the speed of your phone or computer. It tends to be proportional to the time since the last sync, so it’s a good idea to periodically (e.g. daily or weekly) open your wallet app and let it sync so that it can be ready more quickly when you need it.
If you’ll be keeping a substantial amount of money in cryptocurrency, a hardware wallet is an important option to consider. Hardware wallets can run from $80-250 USD, and provide a much more secure way to store your private keys because they are invulnerable to malware running on your phone or computer. Hardware wallets are less convenient than software wallets. It’s a common technique to store most of your crypto in a hardware wallet, sort of like your bank account, while you keep a small amount of crypto on your phone’s software wallet for convenience, sort of like the wallet you’d keep cash in.
Wallets you keep yourself are called non-custodial wallets, because there is no 3rd party custodian (like a bank) that keeps your money. But this is just one option.
An alternative to keeping crypto in your own wallet is to keep your crypto in an online crypto exchange in what is called a custodial wallet. This more closely resembles your relationship with a traditional bank, in that you have a username and password with that exchange, and if you were to forget the password, it’s at least possible that their customer service department can connect you back with your crypto. These exchanges may also be subject to local laws, so in the event of your untimely death, a court order may get your loved ones access to your crypto.
Custodial wallets are presumably well protected against malware, fire, and other hazards.
But keeping your crypto in custodial wallets has serious downsides.
Keeping your crypto on an exchange violates most aspects of a privacy coin you may be using, since the exchange knows your balance and all your transactions.
Many crypto exchanges don’t just sit on your crypto. They invest it — or dare I say, gamble it. And when they lose big, you lose big. Crypto exchanges are not generally FDIC insured or offer any other guarantee that your crypto is safe. Their fine print may even state that crypto you keep with them in your name isn’t technically yours but theirs, which means in a bankruptcy filing, their bills get paid with what they have before you get what’s left over of your crypto. Cryptos have been known to appear reputable and publicly state “everything is fine” the day before filing for bankruptcy.
So many exchanges have failed, losing billions of dollars’ worth of crypto, that the saying “Not your keys, not your crypto” has sprung up. This is a colloquial phrase that strongly advocates for non-custodial wallets. Because non-custodial wallets are untouchable by anyone without the keys, advocates say they are more secure. But there are trade-offs both ways.
Ultimately it comes down to whether you trust an exchange or yourself to keep your private keys and crypto safe, keeping in mind that exchanges will invest your crypto at your own risk rather than their own. My recommendation is to learn how to secure your seed phrase properly, have a succession plan for your untimely death, and then use non-custodial wallets.
The simplest way would be to get some crypto from a friend or acquaintance. If you are a business owner, you could accept crypto payments from your customers. But most folks will need to at least initially get crypto from an exchange. An exchange will typically hook up to your fiat bank account, allowing you to transfer fiat into the exchange, and then use that to buy a variety of cryptocurrencies. Once you ‘own’ cryptocurrencies, you can leave them in your exchange account (a custodial wallet) or withdraw that crypto into your own wallet (a non-custodial wallet).
Choose your exchange carefully. You’ll want a reputable one that follows the laws and regulations in your country. Among these, fees can vary widely. For example, Coinbase is a well-recognized and trusted name in the United States, but it has 1% trade fees. In contrast, Binance.us (a U.S.-compliant of Binance, the largest crypto exchange in the world by volume) charges only 0.1% fees. Why pay 10X as much in trade fees? Coinbase is also infamous for its terrible customer service, and I can witness to that from multiple experiences.
When you have crypto and wish to exchange it for fiat, you’ll get a crypto address from your crypto exchange to send your non-custodial funds to. Once your exchange acknowledges receipt (usually in just a few minutes), you can sell the crypto for fiat, and then withdraw fiat back into your bank account. Note that these exchanges and transfers usually entail a small fee.
As I said your crypto wallet has one or more “addresses”, so too will the wallets of every other crypto user and business that accepts crypto. You spend crypto by opening your own wallet, clicking Send, and entering in someone else’s address and specifying an amount of crypto to send. When you complete that page, your wallet will sign a transaction and broadcast it on the Internet so that one of the next blocks added to the blockchain will include that transaction.
Once the transaction has been sent, there is no recalling it. Assuming that transaction gets included in the blockchain (and it will, if it is valid and you included any applicable network fee), that money is irrevocably sent to the address you specified. If you want a refund, you can ask for one from the person you sent your crypto to.
Most cryptocurrencies are their own thing. They don’t track any real-world money and therefore their value fluctuates relative to fiat you might also use.
But there is a particular variety of cryptocurrencies that track fiat’s value more or less exactly. These are called stable coins, and they are typically named based on the fiat currency they track. Several stable coins track USD, including USDT, USDC, and BUSD. We say these are ‘pegged’ to the US dollar, meaning that theoretically you should always be able to trade 1 token of these cryptocurrencies for exactly $1 USD either direction. This effectively brings many of the benefits of cryptocurrencies to fiat currencies, but without the volatility.
But stable coins are not generally insured, and their issuers are not generally regulated or official government entities. Some so-called stable coins have even failed (we say they came ‘unpegged’), leaving its holders with huge losses when their coin can no longer be exchanged for equal amounts of fiat. Some stable coins are still pegged, but their issuers have been accused of holding far less of the original fiat than they took in, leading to questions as to whether they really are good for returning the fiat should folks want to sell their stable coins back for fiat.
These concerns notwithstanding, stable coins are a very core piece of the cryptocurrency story. A cryptocurrency exchange will typically have the most trading “pairs” where one side is a stablecoin, or BTC in some cases.
Another upcoming variety of stablecoin is what folks call Central Bank Digital Currency (CBDC). The important distinction is that this stablecoin is backed by the same entity that issues the fiat currency that it is pegged to. The United States is evaluating a CBDC for the US dollar. While this would provide greater trust in the stablecoin, it is seen by many in the crypto community as a power grab, as it could give governments total insight into everyone’s accounts and transactions. For example, the US government today does not have automatic visibility into all your transactions, but a CBDC would provide that insight and is seen as a major invasion of privacy. It could also grant the government absolute control over your balance and ability to spend money. We recently saw an incident where Canada froze funds from truckers and those who donated to their cause. That power grab was limited to funds kept in Canadian bank accounts in banks that would participate — cash was invulnerable to it. But can you imagine if all cash were CBDC-backed, such that all your money might suddenly become unspendable and thus worthless, at the whim of the government?
Next to the fact that most folks aren’t as prepared and ready to exchange crypto as they are fiat over Venmo or Paypal, perhaps the most difficult hurdle for crypto to overcome is the tax implications of dealing with it.
In the U.S., the IRS has declared cryptocurrencies to be an asset rather than a currency. This means that every single time you dispense of your crypto, whether by spending it or selling it, it is a taxable event. You have to track not only the sale/spend, but also what you originally paid to acquire that amount of crypto. On your tax return, you report the dates of acquisition and sale, the amounts of purchase and sale, and then the calculated profit/loss, and you pay capital gains tax on the profit. And yes, you can report a loss as well.
The level of bookkeeping required for compliance is equaled only by regular investment broker accounts that are all custodial, and these firms keep careful records to help you when you file your taxes. But crypto exchanges may not keep such records. And even if they did, if you’ve ever used a non-custodial wallet, the exchange simply doesn’t have all the information you’ll need. There are a few web sites that have sprung up to help you track transactions and prepare your tax forms, most of which have a free level and a paid level of service. I’ve used one of these before (https://bitcoin.tax), which was excellent. But lately I just track it all in Quicken, which at the end of the year can produce detailed and aggregate reports which makes filing my taxes easy.
Do not be a tax evader. Just because it’s crypto doesn’t mean you won’t get caught. And the penalties for tax evasion can be very severe including jail time as well as fines.
Where do you go from here?
Now you know the history of crypto, a summary of its pros and cons, and reasons that advocates evangelize it, and at a high level how to get some. You also know a few very important points about securing that crypto.
I did not make specific crypto recommendations nor exchange recommendations. Nor did I get into the specific steps of using any particular wallet, since the steps and UI can vary across wallet software and cryptocurrencies.
You can now research and find your own favorites. If you want to read about my favorites, check out my other crypto pages: Zcash.