If you’re like me, you can feel your head spinning when you hear words and phrases like blockchain, cryptocurrency and digital tokens.
But if you’re also like me, you understand the necessity of understanding virtual currencies as it becomes more mainstream in our financial markets. This is especially true for your Better Business Bureau as we begin to notice more and more scams popping up around this industry.
Before we can educate the public on the various scams surrounding virtual currencies, it’s important to understand what they are.
According to the Commodity Futures Trading Commission, virtual currencies are “a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value.” Basically, each currency is characterized by alphanumeric codes that may be generated and recorded on a blockchain network and recognized as a method of payment by users on that network. While you may be able to spend and trade virtual currencies, they do not have the same legal status as money, or “legal tender,” in the United States, Canada, Mexico and most other areas.
The Internal Revenue Service states that virtual currencies are to be treated as property for U.S. federal tax purposes, with transactions required to be reported in U.S. dollars. That means it isn’t tax-free. For example, if you use virtual currency to pay wages, it is subject to federal income tax withholding. If you hold virtual currencies for personal or investment purposes, the IRS requires you to report any gains or losses, which would be subject to capital gains tax rules.
Keep in mind that knowing about virtual currencies and investing in them are two different things. Investing in virtual currencies can take many forms. In one scenario, you can purchase coins in the hope they will appreciate, or invest in platforms that facilitate blockchain technology and other aspects of the virtual currency revolution and hope they do well. But doing so carries significant risk. Like any investment, only contribute what you can afford to lose and be aware that you may lose some or all of your investment.
As with other types of investing, virtual currency investing has its share of fraud and scams, not to mention cyber attacks. Some common scams include malware threats and fake bitcoin purchases. There are also major questions about how these currencies are regulated both domestically and across the globe. Less regulation means less protection for investors.
To learn more about virtual currency investing visit the Financial Industry Regulatory Authority website at www.finra.org. To stay up to date on the latest scams targeting virtual currency investors, visit bbb.org.