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Cryptocurrency Confusion?

You and your friends talk about a host of different subjects and recently you have talked about cryptocurrencies, including the big one, Bitcoin.  The idea of cryptocurrencies seems like a farce and one giant Ponzi scheme, and you have good reason to think this. Fraud Schemes. But the more you think about it, the more interested you’ve become in adopting, purchasing, trading, or even mining cryptocurrencies.  So, before you start on your new investing endeavor, I implore you to consider the following aspects of crypto-trading.

Volatility is king of the market.  Cryptocurrencies are new financial technologies that have been adopted by only a handful of countries and large institutions.  This lack of adoption has made the price of cryptocurrencies extremely volatile and susceptible to wide market swings.  The immediate event that comes to mine is when Bitcoin, in 2017, had its breakout year. Its value soared to over $20,000 at one point.  This sudden rise in price was swiftly followed by remarks from government regulators from multiple countries, signifying that Bitcoin would not be considered legal tender and that it would face more regulator scrutiny that before.  To no one’s surprise, the price plummeted to just below $3,000 in a matter of days.  A similar rise and fall happened in 2021, when China announced it was banning all cryptocurrencies, which included the mining and trading of Bitcoin.  Bitcoin’s price plummeted from around $55,000 to around $32,000.  Because cryptocurrencies are so volatile and susceptible to the influences of market actors, any funds moved into the market should be limited to what a person can afford to lose, and not a penny more.

What’s a moon boy.  Cryptocurrencies appeal to lots of people and have for years.  At this point, a whole subculture has been formed around the technology and the market lingo that reflects the attitudes and perceptions of crypto traders and participants.  One such identity, attitude, or mentality within crypto has been colorfully termed “moonboy.”  Moonboys can be described as individuals seeking to buy into and/or promote a cryptocurrency’s adoption/purchase by others for the sake of exponential personal gain.  The greater the adoption, the higher the price rises (it is not unheard of the value of a single cryptocurrencies raising over 100 times in a couple days). As the price rises, so does the value of the moonboy’s crypto holdings.  These people will often shamelessly promote a coin, relying on FOMO (fear of missing out) to entice others to purchase. For this reason, any and all crypto investors need to be mindful of the information they are receiving from social media platforms such as discord, twitter, or telegram.  If you are purchasing a coin after being influenced by a third party (moonboy) and you are afraid of missing a “once in a lifetime” financial opportunity, I implore you to stop and rethink your purchase.  The best purchases are often the one’s most thought out and examined.

Yes, there are taxes.  Cryptocurrencies are taxed by the IRS under capital gains/losses, unless you are trading non-fungible tokens (NFTs) then your crypto investment will be taxed as a collectible. NFT Tax GuideNFT IRS Tax Guide. However, your cryptocurrency can only be taxed when a taxable event occurs. There are multiple kinds of events that are taxable, but the main event is when one currency is traded for another.[1] Depending on the size of the transaction and how long you held your currency, your tax liability could reach as high as 35% in federal and state taxes.  You will need to plan ahead and likely account for your taxes at the time of the trade.  If you do not separate out or withdraw any of your gains for taxes, then you could face a situation where you have purchased another volatile currency and the price of that currency drops to a point where you can no longer pay your tax liabilities.  If this happens, you will need to consider trading your currency, thus locking in these losses and canceling out your gains, a harrowing situation that could get worse if your gains and loses are realized during different tax years.  The tax pitfalls do not end there either. You will need to consider employing a crypto-tax app like CoinLedger.[2]

Crypto and Family Law

Cryptocurrency is personal property and therefore subject to division between spouses in a divorce according to the law of the division of any other personal property.  In short, if you acquired it before marriage, odds are it remains separate, your own.  If you acquired it during the marriage and used funds that were gained during the marriage, odds are it is marital property which would mean that your spouse is entitled to an equitable portion of it.

In summary, you will want to remember that the market is very volatile and in the short term could have substantial losses, and the less adopted the cryptocurrency is, then the more volatile.  You will also want to be weary of third parties, particularly those on social media platforms; the SEC and securities laws are only now catching up to the advancement of cryptocurrency, but it was not too long ago that social media influencers were not under any obligation to disclose their financial ties to any crypto promotions.  Be aware of the tax implications from trading cryptocurrencies.  Depending on the size of your trading volume, you should consider hiring tax professionals before filing your tax return.  Finally, while it may be that only one spouse was gung ho on crypto, the crypto is likely the property of both, subject to equitable division in a divorce.

As we lawyers sometimes say, “govern yourself accordingly.”