Q. With Bitcoin’s lower price, I’ve finally started to invest in it and other cryptos. I’ve heard it can be a nightmare to track trades. Is there any way I can make this easier?
A. You’re right that cryptocurrency traders have had a rough time tracking trades, depending on the exchange they use.
But things are getting easier. You just have to be proactive.
Let’s start with how it all works.
Bitcoin is the most popular type of cryptocurrency that uses a large chain of interconnected computers to store and protect digital assets, Lisa McKnight, a certified financial planner with Peapack Private Wealth Management in New Providence.
“Investing in Bitcoin may seem complicated, but really all you need to start investing is 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 is imperative that you practice proper storage and security to ensure your investment is not hacked.”
You will also need to track your cryptocurrency across all wallets, exchanges and platforms in real time, McKnight said. For this, you can use a crypto portfolio tracker app that will allow you to track the total amount and value of your cryptocurrencies, track current and historic transactions and give live prices of the cryptocurrency, she said. Many of the apps also have charting and value prediction tools to help users make timely decisions. Most of the apps are free, but some with more advanced features have annual fees, she said.
Another factor to consider is trade tracking for tax purposes.
” All cryptocurrencies are treated as property for tax purposes; therefore, you can incur capital gains and losses when you buy, sell, trade, or dispose of your crypto,” McKnight said. “Outside of buying, selling and trading, if you earn cryptocurrencies, whether through a job, mining, staking or interest from lending activities, you are responsible for income taxes on the U.S. Dollar value of your crypto earnings.”
She said calculating your capital gains and losses from your crypto trading activity requires detailed records to keep track of your cost basis, fair market value, and the gain or loss every time you dispose of a crypto. Without this information, you are not able to calculate your realized income from your trading activity, and you are not able to report it on your taxes.
McKnight said if you are not skilled at keeping these detailed records and ledgers, you will want to use crypto tax software so that you can accurately report your activities on IRS Form 8949 come tax time.
“As you are aware, Bitcoin is highly volatile and is inclined to have large and fast swings in value, which presents an opportunity for large returns but also poses a tremendous risk,” she said. “It is critical that you learn how to invest in Bitcoin responsibly before making any decisions. Be sure to diversify your investment portfolio to protect yourself from marketplace volatility.”
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.