36 Chambers of Crypto Taxes Series
30th Chamber: Essential Cryptocurrency and Taxation Terms
Why the series title?
I’m a huge Wu Tang Clan fan. Their first album was named Enter the Wu-Tang (36 Chambers). This album changed my life and hip hop forever. It is my goal to change the way complex tax and business issues can be explained to the masses.
What is a cryptocurrency?
Cryptocurrency is a digital currency that uses encryption techniques, rather than a central bank, to generate, exchange, and transfer units of currency. Unlike cash transactions, no bank or government authority verifies the transfer of funds. Instead, these virtual transactions are recorded in a digitized public ledger called a “blockchain.” Individual units of the currency are called “coins.”
“Income tax returns are the most imaginative fiction being written today.” -Herman Wouk
Let’s face it, everyone is not meant to be an expert in everything. Cryptocurrency and taxation are both very complex fields. However, you should want to know the basic terms of both fields in certain situations. You must know certain basic cryptocurrency and taxation terms to survive the IRS upcoming war to enforce cryptocurrency tax reporting. Once you know the basic terms, you can then start to build your knowledge around them. I have compiled a list of the essential cryptocurrency and taxation terms for you to know.
Key cryptocurrency terms to know
Address: A cryptocurrency address is used to receive and send transactions on the network. An address is most commonly represented as a string of alphanumeric characters and sometimes referred to as wallets. Addresses can also be represented as a scannable QR code.
Altcoin: An abbreviation for the phrase “Alternative coins.” Altcoins refer to the numerous cryptocurrencies that launched after the success of bitcoin.
Bitcoin: Created in 2009, bitcoin is the first cryptocurrency that ran on a blockchain network. A person who used the pseudonym Satoshi Nakamoto created it.
Block: A block is a group of cryptocurrency transactions that have been verified.
Blockchain: A blockchain is a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. By design, a blockchain is resistant to modification of the data.
Cryptocurrency Exchange: A cryptocurrency exchange or a digital currency exchange is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies
Cryptocurrency wallet: A cryptocurrency wallet is a device, physical medium, program or a service which stores the public and/or private keys and can be used to track ownership, receive or spend cryptocurrencies. The cryptocurrency itself is not in the wallet.
Decentralized: Refers to a system that doesn’t have a central point of control or authority to verify, confirm and keep transaction data — i.e. a bank in the traditional banking system. A blockchain is decentralized in that each computer that is connected to the blockchain has a unique version of all the data received and stored on the blockchain network and not just a copy of the data. This means that the system is “crowd-maintained” and no single person or organization can alter the data on the blockchain network.
Fork: A fork is a software upgrade that brings new technical features to a blockchain. Within cryptocurrency, a fork refers to an upgrade to a blockchain network. The most common forks occur when a blockchain network’s most influential stakeholders (mainly miners and developers) cannot agree on updates to the protocol.
ICO: An Initial Coin Offering (ICO) is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for bitcoin and ether. It’s somewhat similar to an Initial Public Offering (IPO) in which investors purchase shares of a company.
Mining: Cryptocurrency mining, or cryptomining, is a process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger. In order to be competitive with other cryptominers, though, a cryptocurrency miner needs a computer with specialized hardware.
Key tax terms to know
AGI: Adjusted Gross Income (AGI) is an individual’s total gross income minus specific deductions. For most individual tax purposes, AGI is more relevant than gross income.
Tax credits: A tax credit is an amount of money that taxpayers can subtract from taxes owed to their government. Unlike deductions and exemptions, which reduce the amount of taxable income, tax credits reduce the actual amount of tax owed
Tax deductions: A tax deduction is a deduction that lowers a person’s tax liability by lowering his taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be applied against or subtracted from his gross income in order to figure out how much tax is owed.
Standard deduction: The standard deduction is the portion of income not subject to tax that can be used to reduce your tax bill. You can take the standard deduction only if you do not itemize your deductions using Schedule A of Form 1040 to calculate taxable income.
Itemized deductions: Itemized deductions are eligible expenses that individual taxpayers can claim on federal income tax returns and which decrease their taxable income, and is claimable in place of a standard deduction, if available.
Tax exemption: A tax exemption is the right to exclude all or some income from taxation by federal or states governments. Most taxpayers are entitled to various exemptions to reduce their taxable income, and certain individuals and organizations are completely exempt from paying taxes.
Progressive taxation: A progressive tax is a tax in which the tax rate increases as the taxable amount increases. The term “progressive” refers to the way the tax rate progresses from low to high, with the result that a taxpayer’s average tax rate is less than the person’s marginal tax rate.
Taxable income: Taxable income is the amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year.
Voluntary compliance: Voluntary compliance refers to the principle that taxpayers will cooperate with the tax system by filing honest and accurate annual returns. The U.S. income tax system operates under this assumption. Voluntary means that each taxpayer is expected to prepare and file returns without government involvement.
Withholding tax: A withholding tax is an income tax to be paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient.
Until next time……Blockchain 4 The People!!!!!
Need help with your crypto taxes? Contact me at jamaal@jstaxcorp.com
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