Click here to get this post in PDF
Congratulations! You are a beginner at cryptocurrency. Why is that an accomplishment?
This is an accomplishment because, in May 2021, the cryptocurrency market corrected by 50%, the biggest crash in history, and your money were not in the market at that time. Because your money is not already invested in the market, you do not have to wait for your cryptocurrency positions to recover to the prices you bought them. You also do not have to cry over “spilled milk,” the milk being the profits you could have had had you sold Bitcoin, Ethereum, and Litecoin at the ATH (all-time highs). You can even smile at the crypto veterans losing their shirts to the Great Crypto Crash of 2021, saying that despite your lack of experience, you are smarter than they because they are losing money while you are about to make money, you are buying low.
Cryptos and Tax Returns
As a beginner, you will have a problem that the veterans wish they had, making too much money. Because you are making so much money, the government is going to want their piece. The moment you sell a crypto coin for a profit, you have created a taxable event, regardless of whether convert that coin into a fiat currency or leave it on the exchange as a stable coin, like Tether (USDT), you are going to be responsible for reporting your profits to the IRS and relevant state tax agency so that you can be made to pay the appropriate capital gains tax.
In a situation like that, it is important to have the right crypto tax software. You could, of course, hire a CPA to do your taxes for you but understand that no matter who you hire, it is still your responsibility to report your capital gains and your tax deductions accurately. The my-accountant-said-it-was-ok excuse is not accepted by the U.S. government or by state tax agencies for tax liability purposes.
Therefore, when you prepare your tax report for your crypto gains, it might behoove you to familiarize yourself with the tax software out there: Turbotax, Tokentax, Cointracker, Zenledger, Cryptotrader.tax, and Taxbit. If you are one of those crypto traders that like to take profits early, your tax liability will extend to short-term capital gains tax, which means being taxed at a higher rate than those who hold their positions for more than one year. A crypto trader who holds likes to buy-and-hold will not have a tax liability for unrealized gains as long as the crypto has not been sold, creating a taxable event. Because many investors do not want to give more money from their hard-won crypto gains to regulators than necessary, it is best to truly understand as many legal tricks and rules as possible through a combination of tax software and tax professionals CPAs.
Small Caps Vs. Large Caps
There are two competing schools of thought among investors in the crypto space. Small-cap investors believe that newer, less-established coins, Like Shopping.Io, with low market capitalizations, have more growth potential. Large-cap investors believe, older, better recognized coins, like Bitcoin, are a safer investment.
A small-cap coin, like Shopping, Io, or CRO coin, might have an interesting use case, like using your coin to purchase retail items at fine stores like Kohl and Old Navy. You might ask yourself, “Can I actually use this coin at discount clothing stores near me?
With a small-cap, there is not that much money being a traded, so a big influx of money, let us say $1 billion, could make the coin 100x overnight. The small-cap investor’s attitude is that all cryptocurrency involves risk, so it is better to take risks on coins that can have a high ROI if they do well.
Bitcoin, however, had a market cap of just over $1 trillion from early 2021 until just before the crash. Therefore, would take a large market cap indeed to make Bitcoin 100x any time soon. Bitcoin has, however, made a 4x in the six-month period before the crash, and, for some investors, a safer 4x is better than a riskier possible 100x.
Whether you decide to be a small-cap investor or a large-cap investor is really a personal decision. The truth is that both types of investors have both made and lost money. What is more important is understanding the individual crypto coins and how the larger cryptocurrency market works.
You may also like: What Is Better – Cryptocurrency or Forex Trading?
Images source: Unsplash.com
