For years, Bitcoin and various cryptocurrencies have been steadily rising in popularity. Now, with the availability of Bitcoin exchange-traded funds, investing has become even more accessible. Before diving into the market, however, there are crucial points to consider. This comprehensive guide, derived from BTCC’s Crypto Academy, outlines the essentials for informed investing.

• SEC’s View on Cryptocurrencies: Regulatory Standpoint?
• Could Bitcoin or Other Cryptocurrencies Emerge as the Next Global Currency?
• Can Bitcoin Serve as an Effective Hedge Against Inflation?
• Crypto Taxes: What You Need to Know?
• How Are Bitcoin ETFs Taxed? A Guide to Tax Treatment
• What Are the Risks of Directly Owning Bitcoin and Other Cryptocurrencies?

SEC’s View on Cryptocurrencies: Regulatory Standpoint?

In October 2023, the SEC decided not to contest a federal court ruling, admitting its previous rejection of an investment firm’s spot bitcoin ETF application was incorrect. This marked a significant, albeit reluctant, step forward in the chilly relationship between the SEC and the cryptocurrency market. Despite the recent approval of spot bitcoin ETFs, the SEC’s stance towards crypto investments remains cautious, reflecting long-standing concerns about market volatility, inadequate investor protections, and insufficient regulations. Nevertheless, many observers felt the SEC’s approval, though delayed, was ultimately inevitable, signaling a gradual warming in the regulatory body’s approach to digital assets.
The SEC has given the nod to 11 spot bitcoin ETFs, which commenced trading on January 11, 2024, after years of rejecting numerous applications for ETFs seeking direct investment in bitcoin. However, SEC Chair Gary Gensler cautioned investors, stating, “We did not approve or endorse bitcoin. Investors should remain vigilant against the multiple risks linked to bitcoin and crypto-tied products,” despite approving the listing and trading of specific spot bitcoin ETP shares.

Could Bitcoin or Other Cryptocurrencies Emerge as the Next Global Currency?

The introduction of bitcoin ETFs, according to Schwab, is unlikely to alter the existing obstacles preventing bitcoin from becoming a globally recognized currency. While regulation and consumer protections are crucial, they may not be enough to establish cryptocurrencies as viable alternatives to traditional national currencies. The true test of a currency’s viability lies in its ability to function as an inexpensive and reliable medium of exchange, a unit of account, and a store of value recognized as legal tender. However, bitcoin’s continued volatility and high transaction fees limit its potential in these areas, suggesting that its use as a global currency may remain restricted for the foreseeable future.

Can Bitcoin Serve as an Effective Hedge Against Inflation?

The effectiveness of bitcoin as an inflation hedge remains speculative and unpredictable, primarily due to its value not being directly linked to a specific set of goods or services. While inflation figures steadily climbed in 2021 and 2022, bitcoin saw drastic fluctuations in price, including both steep rallies and precipitous drops. Nevertheless, as interest rates started to fall in 2023, bitcoin showed notable gains, indicating a shift from its perceived role as a hedge against inflation.

Crypto Taxes: What You Need to Know?

Cryptocurrency investors often find themselves caught off-guard by tax liabilities triggered not only when selling bitcoins for U.S. dollars or trading for other assets, but also when using cryptocurrencies to pay for products or services. This is because the IRS currently treats cryptocurrencies as property rather than currency, making each transaction a potentially taxable event. Under these rules, capital gain and loss tax provisionss apply to cryptocurrency dealings, just like any other asset. Investors who hold a cryptocurrency for a year or less will have any realized gain taxed at short-term capital gains rates, which align with ordinary income tax rates for wages. On the other hand, those who hold their cryptocurrencies for over a year benefit from the lower long-term capital gains tax rates on any gains realized.
Offsetting capital gains with cryptocurrency losses is possible. If you sell crypto at a loss, you can deduct it from other gains. Losses exceeding gains can potentially offset up to $3,000 of ordinary income. Any remaining losses can be carried forward indefinitely to reduce future tax year gains.

How Are Bitcoin ETFs Taxed? A Guide to Tax Treatment

Potential investors in bitcoin ETFs should be mindful that they are purchasing ETF shares, rather than direct bitcoin holdings. While the IRS has yet to offer explicit guidance on the tax implications of cryptocurrency or specifically bitcoin ETFs, ETFs are typically taxed as securities, akin to stocks or bonds. However, a complexity arises in the absence of clarity from the IRS regarding “wash sale” regulations. A wash sale occurs when a “security” is sold at a loss to reap tax benefits, followed by the purchase of the same or a similar security within a 30-day window before or after the sale. These rules generally apply to ETFs as securities, but bitcoin, classified as property, remains unaffected by wash sale provisionss.
If you incur losses from a cryptocurrency or bitcoin ETF, consider seeking tax advice to clarify if wash sale rules apply to you. The IRS has not clarified if selling a bitcoin ETF and then purchasing a “substantially identical” cryptocurrency ETF or bitcoin triggers the wash sale rule. Without official IRS guidance on this matter, certainty remains elusive.

What Are the Risks of Directly Owning Bitcoin and Other Cryptocurrencies?

Cryptocurrency markets, including Bitcoin, have always been known for their extreme volatility, often leading to substantial financial losses for investors who misjudge the timing of their sales. Adding to this uncertainty is the looming specter of future regulatory oversight, as the currently loosely-regulated crypto issuance and trading space is anticipated to face stricter controls. This potential shift in the regulatory landscape has been hinted at by U.S. Treasury Secretary Janet Yellen, who expressed concerns over cryptocurrencies being utilized as a vehicle “for illicit financing.
The emergence of cryptocurrencies has sparked concerns over fraud and cybercrime, leading to the possibility of heightened scrutiny from the Financial Crimes Enforcement Network (FinCEN) due to potential noncompliance with the Bank Secrecy Act (BSA) and anti-money laundering regulations. While Bitcoin exchanges have faced challenges such as computer outages caused by overwhelming demand, it’s important to note that the new spot bitcoin ETFs operate within the traditional, regulated exchange environment like the NYSE, rather than the unregulated spot exchanges. This provides a higher level of oversight, transparency, and security compared to commodities traded on unregulated platforms. However, the digital nature of cryptocurrencies means they are not immune to large-scale cyberattacks, which could restrict access during emergencies, unlike physical assets like cash or gold.
Accessing cryptocurrency exchanges typically requires a login ID and password. If these credentials are lost, hacked, or stolen, access could be denied or lost entirely. Although uncommon, bitcoins can be stored like ordinary money in a purse or wallet, enabling spending without a computer. However, this practice incurs the same risks inherent in all cash currencies: they could be lost, stolen, or accidentally destroyed. Trading spot bitcoin ETFs carries its own distinct set of risks, significantly different from those associated with holding or costing physical bitcoins.