The rise and fall of bitcoin has been dominating the news. Its value climbed close to $20,000 for the first time ever in 2017. But it dropped about 70 percent since then, and continues to fluctuate.
The cryptocurrency—released in 2009 by an anonymous computer programmer using the pseudonym Satoshi Nakamoto—is the first decentralized digital currency. This means users can buy merchandise anonymously without any tie to a bank. Others buy bitcoins as an investment. It’s been called “digital gold,” but not everyone is buying into the hype.
Howard Ginsberg, the founder of Ginsberg Wealth Management (an independent financial advising company in Roslyn), had three words for those thinking of using bitcoin: “Don’t do it.” A practicing CPA for more than 25 years, Ginsberg explained his concerns with bitcoin along with its challenges during tax season.
Investing Through The Ages
Why do you think people should steer away from bitcoin?
Right now, bitcoin is really almost akin to gambling. There have been articles comparing it to the Dutch tulip craze in the 1600s where people were buying tulip bulbs for 10 times their annual salary. There’s no reason for the value of bitcoin to be so high at this time…[Cryptocurrencies] probably have potential in the future to be efficient and serve certain purposes but at this time I think it’s too early and too speculative to trust or use. It’s a big bubble.
What are the safety concerns?
I don’t think the technology is there yet. I was just reading about $500 million stolen from a [cryptocurrency exchange] in Japan [in January]…If you’re buying something, investing it and it’s being stored somewhere and it can just disappear, there’s really no reason to buy it.
What about in terms of it being an investment?
If our dollar bill went up 200 or 300 percent and then went down 200 percent our economy would be in shambles…And it dropped tremendously in the month of January, so I don’t see how you could legitimately use bitcoin at this point for any type of transaction.
It’s also tax season. Is bitcoin and other cryptocurrency taxable?
For U.S. citizens, any type of income is generally taxable. But the actual taxation of bitcoin is pretty complicated…There’s the taxability if you pay for something or pay people with bitcoin. One of the other situations is when you buy bitcoin as an investor as if you’re buying stock. The third thing, which is unique to cryptocurrencies, is the actual producing or mining of bitcoins—spending a lot of computer time and effort to actually produce bitcoins, which is something of value. All these things are taxed differently so that’s why it gets a little complicated. For an investor that goes online somewhere to buy bitcoin as an investment and then tries to sell it as an investment, it’s taxed like a capital gain or taxed like a stock. If someone is a designer, or an attorney or an accountant and they get paid in bitcoins, it’s taxable to them as regular earned income.
Is scrutiny growing from the IRS over these cryptocurrencies?
I absolutely think so. The IRS published a document stating that if a business pays another business or pays an individual in bitcoin they are required to issue a 1099 just as they would pay an independent contractor, an independent writer or anybody else. [Anytime a method] where you can transfer value becomes more prominent, the IRS is certainly looking into it.
What would you encourage someone to invest in instead of something like bitcoin?
Solid fundamental investing is usually the best way to invest. I’m a big proponent of being fairly diversified and not trying to time the market.