Gold has been the world’s standard reserve currency for hundreds of years. Even as the world has moved to fiat currency, governments and investors alike still look to gold as a reliable alternative. Given recent volatility, though, it may be crypto’s chance to step in as a different, perhaps more secure option.
On Tuesday, August 11, gold experienced its largest one-day drop in seven years. Prices per ounce fell by 4.7% between Monday and Tuesday, bringing them down from above $2,000 to $1,932.28. This recent drop isn’t the only problem that the precious metal has on its hands, either.
Today’s transactions happen so fast and so frequently that gold transfers can’t keep up. It’s easy enough to transfer tokens representing gold from nation to nation, but moving the actual gold reserves presents a challenge. In the face of these issues, cryptocurrency may provide a solution.
Is Cryptocurrency Less Volatile Than Gold?
Crypto and gold share many similarities, especially in how they compare to fiat currency. Both lack the volatility of fiat currency due to their limited supply, for instance. Gold may not be able to sustain modern markets, though, whereas crypto was born out of the internet age.
Since crypto payments utilize blockchain technology, transaction speed isn’t an issue. Some cryptocurrencies also have measures in place, like Bitcoin halving, that proactively defend against inflation, helping them remain more stable. Still, crypto does have some issues with volatility that gold doesn’t.
Crypto markets are substantially smaller than traditional ones, so small movements have a more significant effect. With such a minuscule market, changes in demand affect the value of crypto more heavily. An alternative may be gold-backed crypto, which might offer the best of both worlds.
With gold-based cryptocurrencies, like the recently-launched Tether Gold, tokens represent an amount of gold instead of representing themselves. The value of physical gold anchors these cryptocurrencies, making them less volatile, while they still offer the speed and security of the blockchain. At the same time, if the value of gold fluctuates, it would cause these cryptocurrencies to shift as well.
Crypto Technologies Gaining Legitimacy
The most substantial barrier to crypto becoming a publicly-accepted reserve currency is its perceived legitimacy. In the past, the public has been distrusting of crypto, but that’s starting to change. More noteworthy people, organizations, and countries are starting to dive into crypto and blockchain.
Several financial giants, like Goldman Sachs and Bank of America, have started using blockchain technology. They may not be using crypto, but accepting crypto’s underlying technology is a substantial step forward. If nothing else, it brings them one step closer to cryptocurrency.
In Venezuela, the public turned to cryptocurrency when the nation’s fiat currency caused a crisis. As inflation rose to around 2,616%, businesses started accepting Bitcoin as an alternative. This real-world example of how crypto can act as a reserve currency could inspire countries to make that switch on a national level.
Crypto Still Has a Ways to Go, But the Future is Promising
Cryptocurrency is still a long way from becoming globally accepted as a reserve currency. Too many people, especially governments, are too distrusting. Despite these obstacles, though, recent events paint a positive picture of crypto’s future, especially as traditional systems fail.
With faith in fiat currency falling and gold prices fluctuating, crypto stands as a promising alternative. The world won’t switch to crypto immediately, but changes are likely to start taking place soon.
This article was curated through CryptoCurrencyNews’ Contributor Program. If you would like to write for us, send us your submission!
For those trading in cryptocurrencies, crypto trading platforms are required to provide you with a form 1099 for use on your taxes. When doing so, the IRS is also notified of the information contained on the tax form. And although you will receive either a form 1099-K or a 1099-B, it is not always clear what the information is saying. For example, a Form 1099-K will provide you with a list of cryptocurrency transactions and sales, but it will not tell you what your tax liability for those transactions is. Form 1099-B does provide more information, including your cost-basis, but many companies have not yet transitioned to the more descriptive form, and instead rely on the old 1099-K, which for many purposes is useless without a working knowledge of capital gains. You can find more information on the differences between Forms 1099-K and 1099-B, here.
So what exactly do you do once you’ve received one of these crypto 1099 forms?
What is a Cost Basis?
The term basis, as used in the Internal Revenue Code, refers to a person’s initial investment in a piece of property. For example, if you purchase something for $10, then your cost basis is $10. If you then sell it for $12, your cost basis is still $10, but your gain on the sale is $2. You are required to report and pay tax on the $2 gain, but not on the original $10 that you spent on the item. This holds true with your cryptocurrency holdings, though it can become much more complex as you likely hold more than $10 in crypto, and your holdings are likely diversified among different types of cryptocurrencies, which decrease and increase in value regularly.
The relevant governing statute for determining one’s basis, as well as gains or losses, can be found in IRC §1012. For the purposes of your cryptocurrency tax liability, you will likely not need to delve into the complexities of the Internal Revenue Code, which, unsurprisingly, is not very helpful to anyone who is not a tax attorney. You can find more information on how to determine your cost basis, here.
What Do I Do With My 1099?
As stated above, a crypto 1099 often comes in one of two forms: 1099-K or 1099-B, and understanding the information on those forms can save a lot of tax-related anxiety. Many cryptocurrency investors panic on receipt of a 1099-K form, as it only shows a list of crypto transactions and not a person’s actual tax liability. In order to determine your tax liability, we will need to refer back to the term “cost basis.” You can find more information on how to determine what is known as an adjusted basis, here.
It is always good practice to keep track of the initial purchase price of any cryptocurrency transaction you make. By doing this, you can keep track of your basis in the specific cryptocurrency holding. If you have not been keeping track, it is likely that your cryptocurrency management platform has.
In order to calculate how much you owe in taxes, all you need to do is look at the transactions listed on your Form 1099-K and subtract them from your initial cost basis of each transaction. The difference between the sale price and your cost basis is the amount realized, or what the IRS will consider your “gain.” You only need to pay taxes on realized gains, meaning if you currently hold cryptocurrency that you have not sold, you do not need to pay taxes on it until you sell it. This becomes increasingly difficult when making a lot of transactions, as each sale results in the need for a computation on gain, even if reinvested in a different cryptocurrency. This is why the Form 1099-K is helpful, as it lists all of the transactions.
For those with high volumes of transactions, it can be helpful to hire a tax attorney or CPA to help you file your taxes to ensure that you do it correctly, especially when determining the correct short-term or long-term capital gains tax, which operates differently than regular income tax.
Conclusion
Now that you have a basic understanding of what a cost basis is and what your crypto 1099 means, you can make your cryptocurrency trades with confidence, knowing that when you receive a Form 1099-K, you likely aren’t liable to pay taxes on the full amounts listed thereon, rather, you only need to pay taxes on your realized gains. And if you receive a Form 1099-B instead, your basis and gain should be clearly listed, for a much easier assessment of your tax liability.
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