I have a couple of friends who are really into Bitcoin, so I’d heard of it even before it was all over the news this week. But I still don’t think I totally understand what Bitcoin is. It’s a currency with no government behind it, which I get. But if it’s a currency, how are people investing in it? And do they have to pay taxes on it even though it’s not backed by the United States government? Is it a safe thing to invest in? Will it keep going up? My friends want me to buy it, and they each own a ton of it, so I’m in need of some expert help!
You’re familiar, it seems, with investing. Stocks (which are essentially ownership stakes in companies) and bonds (which are essentially shares of rights to loan debt) are perhaps the most familiar investment vehicles, but you can invest in currencies, too.
How does it work? Well, if you’ve ever travelled abroad, you’ve probably exchanged U.S. dollars for foreign currency. And when you did that, you probably saw that there was an “exchange rate”–and probably noticed that that exchange rate wasn’t always the same. Currencies can gain and lose value relative to each other, so it’s possible to change money from US dollars into another currency, wait a while, change it back, and end up with more money than you started with–or, of course, less.
Bitcoin is what’s called a cryptocurrency. Cryptocurrencies are digital currencies, and they offer security and privacy features that make them appealing to all sorts of people–for both legitimate and questionable reasons. You’re right to note that Bitcoin isn’t backed by any government. That’s part of its appeal to those who use it for transactions–but also, of course, part of the risk.
Strategists say that trading cryptocurrency for profit works just like trading regular currencies. But not all currencies are equally volatile, and it’s hard not to notice how quickly the value of Bitcoin has shifted lately. Does that mean you should buy more and enjoy profits as it keeps rising to dizzying peaks, or does it mean you should steer clear (or perhaps even short it) to avoid losing big when it falls? Nobody can tell you for sure, but if you want advice, the only place to get it is a financial advisor. Investments come at all different levels of risk, though, so don’t feel like you have to invest either in Bitcoin or nothing at all.
As for taxes, well, there’s no avoiding those. You’ll have to pay taxes if a Bitcoin investment makes you a profit, say New York tax lawyers Mackay, Caswell & Callahan. It doesn’t matter that it’s not backed by a government. And, actually, taxes are a bit strange with Bitcoin: the US government has chosen to treat it as property, rather than a currency, which means more oversight and–sorry!–higher taxes. It’s a good idea to ask your broker or a tax attorney for more details if and when you decide to invest in Bitcoin.
“Bitcoin is the currency of resistance.” — Max Keiser
Steven Callahan is a Financial Analyst and former Writer / Editor for Deadspin.