How does cryptocurrency work?

Cryptocurrencies are exchanged from person to person on the web without a middleman (e.g. a bank or government). They are decentralised which means that no government or bank controls how they’re produced, what their value is, or how they’re exchanged. As a result, cryptocurrencies are worth whatever people are willing to pay or exchange for them.

Cryptocurrencies operate on what is known as blockchain technology. A blockchain is like a really long receipt that keeps growing with each exchange. It’s a public record of all of the transactions that have ever happened in a given cryptocurrency.

 

Safely storing cryptocurrency

After purchasing cryptocurrencies, the next crucial step is determining how and where to securely store it.

While keeping your Bitcoin and any other cryptocurrency on your exchange is an option, the risk of someone hacking the exchange and stealing your Bitcoin makes this method less secure and if possible should be avoided.

The best way of minimising the risk of losing your cryptocurrency to hackers is to store your cryptocurrency in hardware wallets that are offline and can only be accessed by the owner.

A cryptocurrency wallet is a software program designed to store your public and private keys, send and receive cryptocurrencies and monitor their balance. There are many cryptocurrency wallets out there, but the essential distinction between them is whether they are hot or cold.

A hot wallet is connected to the internet and can be accessed at any time (e.g. online cloud wallets, most mobile, and software wallets, and exchanges).

A cold wallet is not connected to the internet and allows to store your funds offline. You can still receive funds at any time, but no-one can transfer them out (e.g. hardware wallets and USB storage devices).

 

How to purchase cryptocurrency

Step 1: Determine appropriate structure

Cryptocurrency markets are extremely volatile so in the event that you make a large capital gain it is important that we first consider the most tax effective structure for you to invest in. Minimising your Capital Gains Tax is all about timing and having the correct investment structures in place.

Once the most tax effective structure has been determined we then need to consider how you purchase the Bitcoins.

 

Step 2: Setup a cryptocurrency wallet

As explained above, investing in cryptocurrencies have inherit risk with hackers being able to steal your cryptocurrency if they are able to hack the online exchange. Therefore, to minimise this risk we need to organise a cryptocurrency wallet. The cryptocurrency wallet works in much the same way as an online bank account you’d use to trade shares. However, it goes further, giving you complete control of your cryptocurrency.

Digital wallets range from small hardware devices to software programs or online platforms. A quick Google search can help you decide which is right for you.

 

Step 3: Select a cryptocurrency exchange

Once you have setup your cryptocurrency wallet, you’ll need to select a crypto exchange. The cryptocurrency exchanges act as the middleman between fiat currencies (I.e. government-issued money like the Aussie dollar) and cryptocurrencies such as Bitcoin, Ethereum or Ripple.

All exchanges charge a trading fee, and this is something to look for. Some also levy additional charges for deposits and withdrawals. The key is to understand when fees apply and how much you’ll pay.

In Australia the most trusted, safe and secure exchange to use is Coinspot

Setting up an account on Coinspot is easy and all you need is an active email address and some ID to verify your account.

Once Coinspot have verified your ID and have activated your account, you will then be able to deposit AUD into the Coinspot account and start buying Bitcoins at the click of your button.

 

Further help

At Marsh & Partners we have developed cryptocurrency specific systems that allow us to calculate your cryptocurrency gains and losses in the most tax effective way. Where possible, we also identify significant tax planning opportunities, restructures and strategies that can minimise your current and future taxation liabilities.

If you are interested in reviewing your options whilst meeting your ATO compliance goals, then we recommend that you contact our highly skilled team to discuss what options are available to you. You can reach us on (07) 3023 4800 or at  mail@marshpartners.com.au.

You can find out more about working with Marsh & Partners here. As your Absolute.Account.Ability partner we’re on a mission to make your business life better. We’ll help you set goals for your business, devise an Action Plan to make them happen and meet with you regularly to ensure you stay on track.

 

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