Explainer: Cryptocurrency

Why Cryptocurrency matters

A cryptocurrency is a form of intangible money. It is a digital currency where transactions, verifications and records are maintained digitally using a blockchain system. It uses cryptography as a decentralized system where coins and tokens are used as a medium of exchange instead of plastic cards or currency notes.

Instead, Cryptocurrency uses blockchain technology. A blockchain refers to a decentralised system of information that is secure from hackers and other threats. Blockchain is a digital record-keeping mechanism used to maintain a record of cryptocurrency.

How people profit from Cryptocurrency

The most popular methods of profiting from cryptocurrency include yield farming and staking. Yield farming works in a similar way to staking but it involves lending cryptocurrency for interest and rewards. Yield farming speculates the returns on an annual percentage yield (APY) basis. Being potentially lucrative and profitable, yet highly risky too.

Staking on the other hand operates with active participation in cryptocurrency dealing and transaction validation that is similar to mining. The proof of stake is the blockchain in which the minimum required balance of a cryptocurrency may earn rewards through staking. Mining is the simplest way of earning cryptocurrency.

Mining is basically putting efforts into creating crypto coins by playing online games and solving complex puzzles and tasks. It also requires a miner to validate transactions on a blockchain. By setting up a crypto wallet and mining equipment miners join a mining pool to specifically mine a digital coin. It is a digital effort just like a normal miner to earn coins digitally.

Binance is one of the biggest cryptocurrency trading platforms

Why Web3 is important

Web3 is basically a ‘read, write, execute’ version of Web2. It involves a blockchain-based web that works on cryptocurrency including NFTs and DAOs. It enables more control of users over their cryptocurrency records and financial transactions through web communities. Being highly risky, many investors used Web3 and faced serious setbacks due to poor risk management.

Moreover, the factor of security risk is always present because no digital system is foolproof and can be hacked. Therefore, cybercrime has greatly increased after the launch of cryptocurrency including crypto frauds, scams, theft and hacking. As far as NFT is concerned, it is the Non-Fungible Token that is retained as a digital asset.

It is bought and sold online using cryptocurrency and backed by the same mechanism of blockchain that is used for cryptocurrency. NFT represents objects like music, items in games, art, and videos. As per Forbes, the market of NFT was $41 billion in 2021 which is equivalent to the total value of the global art market.

Why the ATO wishes to monitor and tax Cryptocurrency

ATO (Australian Taxation Office) however thinks differently and wishes to control and monitor the activities of cryptocurrency on a much deeper level. This is due to the money laundering that has been happening in the recent past using cryptocurrency which was recorded as $8.6 billion in 2021 alone. Therefore ATO issued a warning this year to crypto investors to declare their full capital gains and losses.

The cybercrime rate has also increased due to unmonitored and insecure cryptocurrency. ATO and other governments are taking serious initiatives to control and monitor the misuse of cryptocurrency to develop a secure and safe digital investment hub and medium of exchange. Read more here on the ATO’s crypto page.

Investors often rely on computers to do their own cryptocurrency admin but often don’t realise the tax implications.

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If you are interested in talking more to us about cryptocurrency and how it is taxable in Australia, send in an enquiry via our contact page.

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